ACCOUNTING FOR GOVERNMENTAL AND NONPROFIT ENTITIES, 18TH EDITION JACQUELINE RECK, SUZANNE LOWENSOHN, by QuentinAxel

SOLUTIONS MANUAL

ACCOUNTING FOR GOVERNMENTAL AND NONPROFIT ENTITIES, 18TH EDITION JACQUELINE RECK, SUZANNE LOWENSOHN, EARL WILSON TEST BANK Chapter 1 Introduction to Accounting and Financial Reporting for Government and Not-for-Profit Entities 1) Special purpose governments generally provide a wider range of services to their residents than do general purpose governments. Answer: FALSE Difficulty: 1 Easy Topic: Distinguishing Government and Not-For-Profit Organizations Learning Objective: 01-01 Identify and explain the characteristics that distinguish government and not-for-profit entities from for-profit entities. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 2) Examples of general purpose governments include cities, towns, and public schools that receive tax revenue to finance the services they provide. Answer: TRUE Difficulty: 1 Easy Topic: Distinguishing Government and Not-For-Profit Organizations Learning Objective: 01-01 Identify and explain the characteristics that distinguish government and not-for-profit entities from for-profit entities. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 3) The Governmental Accounting Standards Board (GASB) is the body authorized to establish accounting principles for all state and local governments, both general purpose and special purpose. Answer: TRUE Difficulty: 1 Easy Topic: Sources of financial reporting standards Learning Objective: 01-02 Identify the authoritative bodies responsible for setting financial reporting standards for (1) state and local governments, (2) the federal government, and (3) not-for-profit organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry

4) The Governmental Accounting Standards Board (GASB) is the body authorized to establish accounting principles for all government entities. Answer: FALSE Difficulty: 1 Easy Topic: Sources of financial reporting standards Learning Objective: 01-02 Identify the authoritative bodies responsible for setting financial reporting standards for (1) state and local governments, (2) the federal government, and (3) not-for-profit organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 5) The Financial Accounting Standards Board (FASB) is the body authorized to establish accounting principles for all colleges and universities and health care entities. Answer: FALSE Difficulty: 1 Easy Topic: Sources of financial reporting standards Learning Objective: 01-02 Identify the authoritative bodies responsible for setting financial reporting standards for (1) state and local governments, (2) the federal government, and (3) not-for-profit organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 6) Neither governments nor not-for-profit entities have residual equity that can be distributed to owners. Answer: TRUE Difficulty: 2 Medium Topic: Distinguishing Government and Not-For-Profit Organizations Learning Objective: 01-01 Identify and explain the characteristics that distinguish government and not-for-profit entities from for-profit entities. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

7) A characteristic common to governments and not-for-profit organizations is that they do not exist to provide goods or services at a profit or profit equivalent. Answer: TRUE Difficulty: 2 Medium Topic: Distinguishing Government and Not-For-Profit Organizations Learning Objective: 01-01 Identify and explain the characteristics that distinguish government and not-for-profit entities from for-profit entities. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 8) The needs of users of government financial reports are the same as those of users of business entity financial reports. Answer: FALSE Difficulty: 2 Medium Topic: Distinguishing Government and Not-For-Profit Organizations Learning Objective: 01-01 Identify and explain the characteristics that distinguish government and not-for-profit entities from for-profit entities. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 9) The Federal Accounting Standards Advisory Board (FASAB) recommends accounting principles and standards for the federal government and its agencies and departments. Answer: TRUE Difficulty: 1 Easy Topic: Sources of financial reporting standards Learning Objective: 01-02 Identify the authoritative bodies responsible for setting financial reporting standards for (1) state and local governments, (2) the federal government, and (3) not-for-profit organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry

10) The FASB, GASB, and FASAB all focus their standards on both internal and external financial reporting. Answer: FALSE Difficulty: 2 Medium Topic: Objectives of financial reporting Learning Objective: 01-03 Contrast and compare the objectives of financial reporting for (1) state and local governments, (2) the federal government, and (3) not-for-profit organizations. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 11) Interperiod equity refers to the concept that current-year revenues are sufficient to pay for services provided that year, so that future taxpayers will not be required to assume the burden for services previously provided. Answer: TRUE Difficulty: 2 Medium Topic: Objectives of financial reporting Learning Objective: 01-03 Contrast and compare the objectives of financial reporting for (1) state and local governments, (2) the federal government, and (3) not-for-profit organizations. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 12) The minimum requirements for general purpose external financial reporting are (1) management's discussion and analysis (MD&A), (2) the basic financial statements, including the notes to the financial statements, and (3) combining and individual fund financial statements. Answer: FALSE Difficulty: 1 Easy Topic: Financial Reporting of State and Local Governments Learning Objective: 01-04 Explain the minimum requirements for general purpose external financial reporting for state and local governments and how they relate to comprehensive annual financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

13) The Financial Accounting Foundation has oversight over both the FASB and the GASB. Answer: TRUE Difficulty: 1 Easy Topic: Sources of financial reporting standards Learning Objective: 01-02 Identify the authoritative bodies responsible for setting financial reporting standards for (1) state and local governments, (2) the federal government, and (3) not-for-profit organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 14) In addition to financial statements and notes, the GASB requires governments to provide information on service efforts and accomplishments (SEA) in their reports to the public. Answer: FALSE Difficulty: 2 Medium Topic: Financial Reporting of State and Local Governments Learning Objective: 01-04 Explain the minimum requirements for general purpose external financial reporting for state and local governments and how they relate to comprehensive annual financial reports. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 15) Providing information on accountability is the primary financial reporting objective for both governments and not-for-profit entities. Answer: FALSE Difficulty: 2 Medium Topic: Objectives of financial reporting Learning Objective: 01-03 Contrast and compare the objectives of financial reporting for (1) state and local governments, (2) the federal government, and (3) not-for-profit organizations. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry

16) A difference in the financial reporting objectives for government entities and not-for-profit entities is that government entities report on compliance with laws, regulations, and rules that impact financial reports. Answer: TRUE Difficulty: 2 Medium Topic: Objectives of financial reporting Learning Objective: 01-03 Contrast and compare the objectives of financial reporting for (1) state and local governments, (2) the federal government, and (3) not-for-profit organizations. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 17) Since neither governments nor not-for-profit entities have investors, the financial reporting objectives are the same for both types of entities. Answer: FALSE Difficulty: 2 Medium Topic: Objectives of financial reporting Learning Objective: 01-03 Contrast and compare the objectives of financial reporting for (1) state and local governments, (2) the federal government, and (3) not-for-profit organizations. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Financial reporting 18) The GASB provides optional guidance for those entities providing service efforts and accomplishments (SEA) reports to the public. Answer: TRUE Difficulty: 1 Easy Topic: Financial Reporting of State and Local Governments Learning Objective: 01-04 Explain the minimum requirements for general purpose external financial reporting for state and local governments and how they relate to comprehensive annual financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

19) The Office of Management and Budget (OMB) requires major federal departments and agencies to prepare an annual performance report. Answer: TRUE Difficulty: 1 Easy Topic: Financial Reporting of the Federal Government Learning Objective: 01-05 Identify and describe the required financial statements for the federal government. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 20) The FASB standards require not-for-profit entities to report net assets in three categories: unrestricted, restricted, and net investment in capital assets. Answer: FALSE Difficulty: 1 Easy Topic: Financial Reporting of Not-For-Profit Organizations Learning Objective: 01-06 Identify and describe the required financial statements for not-for-profit organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 21) The FASB standards require not-for-profit entities to separately report program expenses and support expenses. Answer: TRUE Difficulty: 1 Easy Topic: Financial Reporting of Not-For-Profit Organizations Learning Objective: 01-06 Identify and describe the required financial statements for not-for-profit organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 22) The governmental fund financial statements are intended to report on fiscal accountability. Answer: TRUE Difficulty: 1 Easy Topic: Financial Reporting of State and Local Governments Learning Objective: 01-04 Explain the minimum requirements for general purpose external financial reporting for state and local governments and how they relate to comprehensive annual financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 7

23) The governmental fund financial statements are useful in assessing operational accountability. Answer: FALSE Difficulty: 1 Easy Topic: Financial Reporting of State and Local Governments Learning Objective: 01-04 Explain the minimum requirements for general purpose external financial reporting for state and local governments and how they relate to comprehensive annual financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 24) Government-wide financial statements are prepared using the accrual basis of accounting. Answer: TRUE Difficulty: 1 Easy Topic: Financial Reporting of State and Local Governments Learning Objective: 01-04 Explain the minimum requirements for general purpose external financial reporting for state and local governments and how they relate to comprehensive annual financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 25) Both the GASB and the FASB require entities to include a management discussion and analysis in the financial reports. Answer: FALSE Difficulty: 2 Medium Topic: Overview of Financial Reporting for State and Local Governments, the Federal Government, and Not-for-profit Organizations Learning Objective: 01-04 Explain the minimum requirements for general purpose external financial reporting for state and local governments and how they relate to comprehensive annual financial reports.; 01-06 Identify and describe the required financial statements for not-for-profit organizations. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

26) Similar to for-profit entities, net income serves as a good measure of a government's performance. Answer: FALSE Difficulty: 2 Medium Topic: Distinguishing Government and Not-For-Profit Organizations Learning Objective: 01-01 Identify and explain the characteristics that distinguish government and not-for-profit entities from for-profit entities. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 27) The Governmental Accounting Standards Board is assigned responsibility for setting accounting and financial reporting standards for A) Governments such as federal agencies, states, cities, counties, villages, and townships. B) State and local government entities and governmentally-related units and agencies, such as utilities, authorities, hospitals, and colleges and universities. C) Not-for-profit organizations. D) State and local governments and all not-for-profit organizations. Answer: B Difficulty: 2 Medium Topic: Sources of financial reporting standards Learning Objective: 01-02 Identify the authoritative bodies responsible for setting financial reporting standards for (1) state and local governments, (2) the federal government, and (3) not-for-profit organizations. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 28) The body that has been established to recommend accounting and financial reporting standards for the federal government is the A) Financial Accounting Standards Board (FASB). B) Governmental Accounting Standards Board (GASB). C) Federal Accounting Foundation (FAF). D) Federal Accounting Standards Advisory Board (FASAB). Answer: D Difficulty: 1 Easy Topic: Sources of financial reporting standards Learning Objective: 01-02 Identify the authoritative bodies responsible for setting financial reporting standards for (1) state and local governments, (2) the federal government, and (3) not-for-profit organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 9

29) The Financial Accounting Standards Board has the responsibility for setting accounting and financial reporting standards for A) All not-for-profit organizations that are nongovernmental and business entities. B) All not-for-profit organizations and business entities. C) All not-for-profit organizations. D) Special purpose governments with a business purpose. Answer: A Difficulty: 1 Easy Topic: Sources of financial reporting standards Learning Objective: 01-02 Identify the authoritative bodies responsible for setting financial reporting standards for (1) state and local governments, (2) the federal government, and (3) not-for-profit organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 30) You are trying to decide if an entity you are reviewing is a government or a not-for-profit. Which of the following would indicate it is a government rather than a not-for-profit entity? A) Absence of profit motive. B) A primary source of revenues is taxes. C) Resource providers do not expect benefits proportional to the resources provided. D) Absence of a defined ownership interest that can be sold, transferred, or redeemed. Answer: B Difficulty: 2 Medium Topic: Distinguishing Government and Not-For-Profit Organizations Learning Objective: 01-01 Identify and explain the characteristics that distinguish government and not-for-profit entities from for-profit entities. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry

31) Which of the following is identified by the GASB as the "cornerstone" of all financial reporting in government? A) Decision usefulness. B) Stewardship. C) Accountability. D) Interperiod equity. Answer: C Difficulty: 1 Easy Topic: Objectives of financial reporting Learning Objective: 01-03 Contrast and compare the objectives of financial reporting for (1) state and local governments, (2) the federal government, and (3) not-for-profit organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 32) Which of the following organizations issue standards that focus on both internal and external financial reporting? A) Federal Accounting Standards Advisory Board. B) Governmental Accounting Standards Board. C) Financial Accounting Standards Board. D) American Institute of CPAs. Answer: A Difficulty: 1 Easy Topic: Objectives of financial reporting Learning Objective: 01-03 Contrast and compare the objectives of financial reporting for (1) state and local governments, (2) the federal government, and (3) not-for-profit organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 33) Which of the following is identified by the FASAB as the foundation for federal financial reporting? A) Decision usefulness. B) Accountability. C) Understandability. D) Budget integrity. Answer: B Difficulty: 1 Easy Topic: Objectives of financial reporting Learning Objective: 01-03 Contrast and compare the objectives of financial reporting for (1) state and local governments, (2) the federal government, and (3) not-for-profit organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 11

34) Which of the following is not an objective of financial reporting by state and local governments? A) To assist users in assessing the adequacy of systems and controls. B) To assist users in assessing financial condition and results of operations. C) To assist financial report users in comparing actual financial results with the legally adopted budget. D) To assist in determining compliance with finance-related laws, rules, and regulations. Answer: A Difficulty: 2 Medium Topic: Objectives of financial reporting Learning Objective: 01-03 Contrast and compare the objectives of financial reporting for (1) state and local governments, (2) the federal government, and (3) not-for-profit organizations. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 35) Which of the following groups is considered a primary user of a state or local government's general-purpose external financial statements? A) Citizens. B) Managers and administrators. C) Employees. D) Special interest groups. Answer: A Difficulty: 1 Easy Topic: Objectives of financial reporting Learning Objective: 01-03 Contrast and compare the objectives of financial reporting for (1) state and local governments, (2) the federal government, and (3) not-for-profit organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry

36) One of the minimum requirements for general purpose external financial reporting by governments is A) Management's discussion and analysis (MD&A). B) Transmittal letter. C) Combining and individual fund statements. D) Statistical information. Answer: A Difficulty: 1 Easy Topic: Financial Reporting of State and Local Governments Learning Objective: 01-04 Explain the minimum requirements for general purpose external financial reporting for state and local governments and how they relate to comprehensive annual financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 37) A comprehensive annual financial report (CAFR) prepared in conformity with the GASB recommendations should include which of the following sections? A) Letter of transmittal, management's discussion and analysis (MD&A), and financial. B) Introductory, financial, and statistical. C) Introductory, MD&A, and financial. D) Letter of transmittal, financial, and supplementary. Answer: B Difficulty: 1 Easy Topic: Financial Reporting of State and Local Governments Learning Objective: 01-04 Explain the minimum requirements for general purpose external financial reporting for state and local governments and how they relate to comprehensive annual financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

38) Which of the following would be included in a properly prepared comprehensive annual financial report (CAFR), but not in the minimum requirements for general purpose financial reporting specified by GASB standards? A) Management's discussion and analysis (MD&A). B) Government-wide financial statements. C) Notes to the financial statements. D) Combining and individual fund financial statements. Answer: D Difficulty: 2 Medium Topic: Financial Reporting of State and Local Governments Learning Objective: 01-04 Explain the minimum requirements for general purpose external financial reporting for state and local governments and how they relate to comprehensive annual financial reports. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 39) A statistical section should be included in A) A comprehensive annual financial report (CAFR). B) The basic financial statements. C) The notes to the financial statements. D) Required supplementary information, other than MD&A. Answer: A Difficulty: 1 Easy Topic: Financial Reporting of State and Local Governments Learning Objective: 01-04 Explain the minimum requirements for general purpose external financial reporting for state and local governments and how they relate to comprehensive annual financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

40) Which of the following would typically not be included in the introductory section of a comprehensive annual financial report? A) Title and contents page. B) Letter of transmittal. C) A description of the government. D) Summary of the government's current financial position and results of financial activities. Answer: D Difficulty: 1 Easy Topic: Financial Reporting of State and Local Governments Learning Objective: 01-04 Explain the minimum requirements for general purpose external financial reporting for state and local governments and how they relate to comprehensive annual financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 41) The section of the comprehensive annual financial report that presents tables and charts showing social and economic data in addition to financial trends, fiscal capacity, and operating information of the government is the: A) Introductory section. B) Management's discussion and analysis section. C) Statistical section. D) Financial section. Answer: C Difficulty: 1 Easy Topic: Financial Reporting of State and Local Governments Learning Objective: 01-04 Explain the minimum requirements for general purpose external financial reporting for state and local governments and how they relate to comprehensive annual financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

42) Which of the following should be included in the financial section of a comprehensive annual financial report? A) Transmittal letter. B) The basic financial statements, including notes thereto. C) Tables and charts showing demographic and economic data. D) A description of the government. Answer: B Difficulty: 1 Easy Topic: Financial Reporting of State and Local Governments Learning Objective: 01-04 Explain the minimum requirements for general purpose external financial reporting for state and local governments and how they relate to comprehensive annual financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 43) On what do the government-wide financial statements report? A) Operational accountability. B) Fiscal accountability. C) The cost of government services. D) Budgetary compliance. Answer: A Difficulty: 1 Easy Topic: Financial Reporting of State and Local Governments Learning Objective: 01-04 Explain the minimum requirements for general purpose external financial reporting for state and local governments and how they relate to comprehensive annual financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

44) Which of the following standard-setting bodies requires a management's discussion and analysis as a part of the financial report? A) GASB. B) FASB. C) FASAB. D) Both GASB and FASAB. Answer: D Difficulty: 2 Medium Topic: Overview of Financial Reporting for State and Local Governments, the Federal Government, and Not-for-profit Organizations Learning Objective: 01-04 Explain the minimum requirements for general purpose external financial reporting for state and local governments and how they relate to comprehensive annual financial reports.; 01-05 Identify and describe the required financial statements for the federal government. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 45) On what should the governmental fund financial statements report? A) Net position and results of financial operations of the government as a whole. B) Fiscal accountability. C) Operational accountability. D) Cost of government services. Answer: B Difficulty: 1 Easy Topic: Financial Reporting of State and Local Governments Learning Objective: 01-04 Explain the minimum requirements for general purpose external financial reporting for state and local governments and how they relate to comprehensive annual financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

46) Which of the following sections is not considered a part of a federal agency's performance and accountability report? A) Basic financial statements. B) Annual performance report. C) Statistical section. D) Management's discussion and analysis. Answer: C Difficulty: 1 Easy Topic: Financial Reporting of the Federal Government Learning Objective: 01-05 Identify and describe the required financial statements for the federal government. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 47) Which of the following statements is prepared by all not-for-profit organizations? A) Statement of financial position. B) Statement of changes in net position. C) Statement of revenues, expenses, and changes in net position. D) Both Statement of financial position and Statement of changes in net position. Answer: A Difficulty: 1 Easy Topic: Financial Reporting of Not-For-Profit Organizations Learning Objective: 01-06 Identify and describe the required financial statements for not-for-profit organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 48) Recognizing revenues when measurable and available for paying current obligations and expenditures when incurred describes which basis of accounting? A) Accrual. B) Modified accrual. C) Modified cash. D) Budgetary. Answer: B Difficulty: 1 Easy Topic: Financial Reporting of State and Local Governments Learning Objective: 01-04 Explain the minimum requirements for general purpose external financial reporting for state and local governments and how they relate to comprehensive annual financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 18

49) The FASB requires that a statement showing the relationship of functional expenses to natural classifications of expense be prepared by which of the following entities? A) Colleges and universities. B) Health care entities. C) Voluntary health and welfare entities. D) All not-for-profit entities. Answer: D Difficulty: 2 Medium Topic: Financial Reporting of Not-For-Profit Organizations Learning Objective: 01-06 Identify and describe the required financial statements for not-for-profit organizations. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 50) Which of the following is a net asset category reported by not-for-profit entities? A) Unrestricted net assets. B) Net assets with donor restrictions. C) Temporarily restricted net assets. D) Net investment in capital assets. Answer: B Difficulty: 1 Easy Topic: Financial Reporting of Not-For-Profit Organizations Learning Objective: 01-06 Identify and describe the required financial statements for not-for-profit organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 51) Which of the following is not classified as a support activity reported by not-for-profit entities? A) Fund-raising expenses. B) Program expenses. C) Management expenses. D) General expenses of operating the not-for-profit entity. Answer: B Difficulty: 1 Easy Topic: Financial Reporting of Not-For-Profit Organizations Learning Objective: 01-06 Identify and describe the required financial statements for not-for-profit organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 19

52) The FASAB's Statement of Accounting and Reporting Concepts Statement No. 1 identifies four objectives of federal financial reporting. The requirement to be publicly accountable for laws and regulations related to spending tax revenues relates to which of the four objectives? A) Stewardship. B) Operating performance. C) Budgetary integrity. D) Accountability. Answer: C Difficulty: 2 Medium Topic: Objectives of financial reporting Learning Objective: 01-03 Contrast and compare the objectives of financial reporting for (1) state and local governments, (2) the federal government, and (3) not-for-profit organizations. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 53) Explain the essential differences between general purpose and special purpose governments and give several examples of each. Answer: General purpose governments are those that provide many categories of services to residents. These include states, counties, municipalities, and townships. Special purpose governments provide only a single or, at most, a few functions. Examples of special purpose governments are special political subdivisions or districts that provide education, drainage and flood control, irrigation, soil and water conservation, fire protection, and water supply. Public colleges and universities are another example. Difficulty: 2 Medium Topic: Financial Reporting of State and Local Governments Learning Objective: 01-04 Explain the minimum requirements for general purpose external financial reporting for state and local governments and how they relate to comprehensive annual financial reports. Bloom's: Understand AACSB: Communication AICPA: BB Industry

54) Identify and explain the characteristics that distinguish governments and not-for-profit entities from business entities. Answer: Governments and not-for-profit entities (nonbusiness entities) do not have owners who expect a return on their investment. Resource providers to these entities do not expect to be repaid or to receive economic benefits in proportion to the resources provided. Governments and not-for-profit entities do not operate to make a profit on goods or services provided. On the other hand, business entities do have owners whose interests can be transferred to others and who expect a share of the profits from operating the business and a residual distribution of the net assets in the case of liquidation of the organization (see FASB Concepts Statements). Difficulty: 2 Medium Topic: Distinguishing Government and Not-For-Profit Organizations Learning Objective: 01-01 Identify and explain the characteristics that distinguish government and not-for-profit entities from for-profit entities. Bloom's: Understand AACSB: Communication AICPA: BB Industry 55) GASB and FASB standards are concerned only with external financial reporting; whereas, FASAB standards are concerned with both internal and external financial reporting. Do you agree with this statement? Why or why not? Answer: Agree. Both the Governmental Accounting Standards Board (GASB) and the Financial Accounting Standards Board (FASB) issue standards for external users of financial information—those who lack the authority to prescribe information they want and who must rely on the information management communicates to them. By contrast, the Federal Accounting Standards Advisory Board (FASAB) has identified users who are both internal and external to the government: citizens, the Congress, executives, and program managers. Not surprisingly, then, its standards address both internal and external financial information needs. Difficulty: 2 Medium Topic: Objectives of financial reporting Learning Objective: 01-03 Contrast and compare the objectives of financial reporting for (1) state and local governments, (2) the federal government, and (3) not-for-profit organizations. Bloom's: Understand AACSB: Communication AICPA: BB Industry

56) Why should persons interested in reading financial reports of governments and not-for-profit entities be familiar with standards set by the GASB and the FASB? Answer: Financial reports can be read intelligently only by persons who understand the real meaning of the terms used in the reports, and who understand the standards that guide the presentation of financial information. Difficulty: 2 Medium Topic: Objectives of financial reporting Learning Objective: 01-03 Contrast and compare the objectives of financial reporting for (1) state and local governments, (2) the federal government, and (3) not-for-profit organizations. Bloom's: Understand AACSB: Communication AICPA: BB Industry 57) Explain in your own words why accountability is the cornerstone of all financial reporting in government. Answer: Accountability is based on the belief that the citizenry has a "right to know" about public resources raised during a fiscal period and the purposes for which the resources were used. In a democratic society, public officials have an obligation to be accountable to the public. Difficulty: 2 Medium Topic: Objectives of financial reporting Learning Objective: 01-03 Contrast and compare the objectives of financial reporting for (1) state and local governments, (2) the federal government, and (3) not-for-profit organizations. Bloom's: Understand AACSB: Communication AICPA: FN Reporting 58) In your own words state the primary uses the GASB believes external users have for financial reports of state and local governments. For contrast, state the uses the FASB believes external users have for the financial reports of not-for-profit organizations. Answer: External users of government financial reports, the GASB believes, need to (1) compare actual financial results with the legally adopted budget; (2) assess financial condition and results of financial operations; (3) assist in determining compliance with finance-related laws, rules, and regulations; and (4) assist in evaluating efficiency and effectiveness. The FASB believes that financial reports of not-for-profit organizations should provide information (1) useful in making resource allocation decisions, (2) useful in assessing services and ability to provide services, (3) useful in assessing management stewardship and performance, and (4) about economic resources, obligations, net resources, and changes in them. Difficulty: 2 Medium Topic: Objectives of financial reporting Learning Objective: 01-03 Contrast and compare the objectives of financial reporting for (1) state and local governments, (2) the federal government, and (3) not-for-profit organizations. Bloom's: Understand AACSB: Communication AICPA: BB Industry 22

59) Describe the difference between a comprehensive annual financial report (CAFR) and GASB general purpose external financial reporting for state and local governments. Answer: By definition, the comprehensive annual financial report (CAFR) is more inclusive than the general purpose external financial information described in GASB standards. The CAFR presents three types of information: (1) introductory material from the entity's management, such as transmittal letters, organizational charts, and awards; (2) financial statements (including the financial information required by the GASB); and (3) statistical information, such as demographic information about the entity and summaries of tax rates and property assessed values over time. By contrast, GASB standards require general purpose external reports to include: (1) management discussion & analysis (MD&A), (2) government-wide financial statements, (3) fund financial statements, (4) notes to those statements, and (5) other required supplementary information (RSI). Difficulty: 2 Medium Topic: Financial Reporting of State and Local Governments Learning Objective: 01-04 Explain the minimum requirements for general purpose external financial reporting for state and local governments and how they relate to comprehensive annual financial reports. Bloom's: Understand AACSB: Communication AICPA: FN Reporting

60) Identify and briefly explain the four sections of the performance and accountability report (PAR) that the Office of Management and Budget requires major federal departments and agencies to prepare. Answer: The four parts and an explanation of their content are: 1. The management's discussion and analysis – it serves as a brief overview of the entire PAR and clearly describes the department or agency's mission and organizational structure; its performance goals, objectives, and results; analysis of its financial statements; and analysis of information about internal controls and legal compliance. 2. The annual performance report (APR) (or performance section) – it provides information about the agency's performance and progress in achieving its performance goals. 3. Basic financial statements – these include a balance sheet, statement of net cost (essentially an operating statement format that places expenses over revenues—program costs minus earned revenues = net cost), statement of changes in net position (similar to changes in owners' equity in business accounting), statement of budgetary resources, statement of custodial activity, and statement of social insurance. 4. Other accompanying information – this includes information such as perspectives on the tax burden, size of the tax gap, challenges facing management, and revenue forgone. Difficulty: 2 Medium Topic: Financial Reporting of the Federal Government Learning Objective: 01-05 Identify and describe the required financial statements for the federal government. Bloom's: Understand AACSB: Communication AICPA: FN Reporting 61) Explain the concepts fiscal and operational accountability and the basis of accounting used to capture each concept. Answer: Fiscal accountability focuses on the short-term flow of resources, or how government has used its resources in the short-term; whereas, operational accountability focuses on the efficient and effective use of resources by the government. To help capture these different types of accountability different bases of accounting are used. Fiscal accountability is captured using the modified accrual basis of accounting where revenues are recognized in the period they are measurable and available for spending and expenditures (not expenses) are recognized when they create an obligation to be paid from current financial resources. Operational accountability is captured using accrual accounting. Under accrual accounting the focus is on the flow of economic resources allowing revenues and expense to be recognized when an exchange of economic resources occurs. Difficulty: 2 Medium Topic: Financial Reporting of State and Local Governments Learning Objective: 01-04 Explain the minimum requirements for general purpose external financial reporting for state and local governments and how they relate to comprehensive annual financial reports. Bloom's: Understand AACSB: Communication AICPA: FN Reporting 24

62) Describe the comprehensive annual financial report (CAFR). What are the sections of the report and which components of the organization should it include? Is a CAFR required? Answer: The CAFR is recommended, but not required. The CAFR is comprised of three sections: (1) introductory section, (2) financial section, and (3) statistical section. All activities of the primary government and its component units should be included in the reporting entity covered by the CAFR. The minimum financial reporting requirements include (1) MD&A, (2) basic financial statements, and (3) required supplementary information other than the MD&A. Difficulty: 2 Medium Topic: Financial Reporting of State and Local Governments Learning Objective: 01-04 Explain the minimum requirements for general purpose external financial reporting for state and local governments and how they relate to comprehensive annual financial reports. Bloom's: Understand AACSB: Communication AICPA: BB Industry

Accounting for Governmental and Nonprofit Entities, 18e (Reck) Chapter 2 Principles of Accounting and Financial Reporting for State and Local Governments 1) According to the guidance of GASB Concepts Statement 3, financial information can be communicated by recognition in the financial statements, disclosure in the notes to the financial statements, presentation as required supplementary information, or presentation as supplementary information. Answer: TRUE Difficulty: 1 Easy Topic: Conceptual Framework-Providing Useful Financial Reports Learning Objective: 02-01 Describe the concepts related to the financial reporting requirements of the GASB reporting model. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 2) According to GASB Concepts Statement 1 a primary objective of financial reports is to provide information useful in determining the accountability of the government. Answer: TRUE Difficulty: 1 Easy Topic: Conceptual Framework-Providing Useful Financial Reports Learning Objective: 02-01 Describe the concepts related to the financial reporting requirements of the GASB reporting model. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 3) Activities a local government can engage in are classified as governmental, business-type, or fiduciary. Answer: TRUE Difficulty: 1 Easy Topic: Activities of Government Learning Objective: 02-02 Explain the nature of the three major activity categories of a state or local government: governmental activities, business-type activities, and fiduciary activities. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

4) Governmental funds are identical to governmental activities, proprietary funds are identical to business-type activities, and fiduciary funds are identical to fiduciary activities of a government. Answer: FALSE Difficulty: 2 Medium Topic: Financial Reporting Model Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 5) Only those governmental and proprietary funds that meet the GASB size criteria for major funds are reported in separate columns of the governmental and proprietary fund financial statements. Answer: FALSE Difficulty: 2 Medium Topic: Financial Reporting Model Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 6) Economic resources are cash or items expected to be converted into cash during the current period, or soon enough thereafter to pay current period liabilities. Answer: FALSE Difficulty: 1 Easy Topic: Fund Reporting Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

7) Governmental funds account for assets but not the liabilities. Answer: FALSE Difficulty: 1 Easy Topic: Financial Reporting Model Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 8) The types of funds that may be used in governmental accounting are classified into the three categories of governmental, proprietary, and fiduciary. Answer: TRUE Difficulty: 1 Easy Topic: Financial Reporting Model Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 9) The governmental funds category includes the General Fund, special revenue funds, debt service funds, capital projects funds, and internal service funds. Answer: FALSE Difficulty: 1 Easy Topic: Fund Reporting Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

10) Governments can, in part, demonstrate operational accountability by reporting proprietary and fiduciary fund financial information, as well as all government-wide financial information, using an economic resources measurement focus and the accrual basis of accounting. Answer: TRUE Difficulty: 2 Medium Topic: Financial Reporting Model Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 11) All capital assets acquired by or used by a fund should be reported in the fund balance sheet or statement of net position. Answer: FALSE Difficulty: 2 Medium Topic: Financial Reporting Model Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 12) Because budgetary accounts are used by governments, government financial statements can never be said to be in accord with generally accepted accounting principles. Answer: FALSE Difficulty: 2 Medium Topic: Fund Reporting Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

13) The maximum sets of fund financial statements a government would present are three. Answer: TRUE Difficulty: 3 Hard Topic: Financial Reporting Model Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 14) When revenues are legally restricted by external resource providers or committed by enabling legislation for particular operating purposes, a private purpose trust fund is created. Answer: FALSE Difficulty: 2 Medium Topic: Fund Reporting Learning Objective: 02-02 Explain the nature of the three major activity categories of a state or local government: governmental activities, business-type activities, and fiduciary activities.; 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 15) A debt service fund is used to account for financial resources segregated for the purpose of making principal and interest payments on general long-term debt. Answer: TRUE Difficulty: 1 Easy Topic: Fund Reporting Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

16) A deferred inflow of resources is defined as "an acquisition of net assets by the government that is applicable to a future reporting period." Answer: TRUE Difficulty: 1 Easy Topic: Conceptual Framework-Providing Useful Financial Reports Learning Objective: 02-01 Describe the concepts related to the financial reporting requirements of the GASB reporting model. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 17) Expenditures are never recorded in governmental funds. Answer: FALSE Difficulty: 1 Easy Topic: Financial Reporting Model Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 18) Deferred outflow of resources is a type of asset that is unique to government. Answer: FALSE Difficulty: 1 Easy Topic: Conceptual Framework-Providing Useful Financial Reports Learning Objective: 02-01 Describe the concepts related to the financial reporting requirements of the GASB reporting model. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 19) Revenues is an example of what the GASB terms an inflow of resources. Answer: TRUE Difficulty: 1 Easy Topic: Conceptual Framework-Providing Useful Financial Reports Learning Objective: 02-01 Describe the concepts related to the financial reporting requirements of the GASB reporting model. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 6

20) An expenditure is an example of what the GASB terms an outflow of resources. Answer: TRUE Difficulty: 1 Easy Topic: Conceptual Framework-Providing Useful Financial Reports Learning Objective: 02-01 Describe the concepts related to the financial reporting requirements of the GASB reporting model. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 21) Deferred inflow of resources and deferred outflow of resources would be shown in separate sections of a government's statement of net position. Answer: TRUE Difficulty: 1 Easy Topic: Conceptual Framework-Providing Useful Financial Reports Learning Objective: 02-01 Describe the concepts related to the financial reporting requirements of the GASB reporting model. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 22) In accordance with GASB standards, a deferred inflow of resources is reported on the financial statements the same as an unearned revenue. Answer: FALSE Difficulty: 1 Easy Topic: Conceptual Framework-Providing Useful Financial Reports Learning Objective: 02-01 Describe the concepts related to the financial reporting requirements of the GASB reporting model. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 23) The GASB concept statements indicate that an asset that is going to be converted to cash should be reported at a remeasured amount at the financial statement date. Answer: TRUE Difficulty: 1 Easy Topic: Conceptual Framework-Providing Useful Financial Reports Learning Objective: 02-01 Describe the concepts related to the financial reporting requirements of the GASB reporting model. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 7

24) Proprietary funds primarily provide services to the general public for a fee. Answer: FALSE Difficulty: 1 Easy Topic: Financial Reporting Model Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 25) A permanent endowment is an example of a nonspendable fund balance. Answer: TRUE Difficulty: 1 Easy Topic: Fund Reporting Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 26) Assigned fund balances can be either positive or negative. Answer: FALSE Difficulty: 1 Easy Topic: Fund Reporting Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

27) The General Fund is the only fund that can have a positive unassigned fund balance. Answer: TRUE Difficulty: 2 Medium Topic: Fund Reporting Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 28) The positive fund balance in a special revenue fund must at a minimum be reported as assigned. Answer: TRUE Difficulty: 2 Medium Topic: Fund Reporting Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 29) Nonmajor funds are not reported on the fund financial statements. Answer: FALSE Difficulty: 1 Easy Topic: Fund Reporting Learning Objective: 02-04 Discuss the nature of major fund reporting and the criteria used to determine whether a fund should be reported as a major fund. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

30) There are four major activity categories reported by state and local governments: governmental, government-wide, proprietary, and fiduciary. Answer: FALSE Difficulty: 1 Easy Topic: Activities of Government Learning Objective: 02-02 Explain the nature of the three major activity categories of a state or local government: governmental activities, business-type activities, and fiduciary activities. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 31) Governmental activities include the core services provided by a government, such as public safety. Answer: TRUE Difficulty: 1 Easy Topic: Activities of Government Learning Objective: 02-02 Explain the nature of the three major activity categories of a state or local government: governmental activities, business-type activities, and fiduciary activities. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 32) Which of the following is a primary objective of financial reporting by state and local governments? A) To provide information that can be used for capital allocation decisions made by external investors. B) To report on the legal requirements imposed on the government by its elected officials. C) To provide information that can be used to assess a government's accountability. D) To fulfill the government's statutory duty to report on cash received and cash disbursed. Answer: C Difficulty: 1 Easy Topic: Conceptual Framework-Providing Useful Financial Reports Learning Objective: 02-01 Describe the concepts related to the financial reporting requirements of the GASB reporting model. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

33) According to the GASB definition, which of the following represents an inflow of resources? A) Expenditures. B) Revenues. C) Assets. D) Deferred inflows. Answer: B Difficulty: 1 Easy Topic: Conceptual Framework-Providing Useful Financial Reports Learning Objective: 02-01 Describe the concepts related to the financial reporting requirements of the GASB reporting model. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 34) According to the GASB, information that is essential and useful to placing information in the correct context should be reported as which of the following? A) Required supplementary information. B) Supplementary information. C) Notes to the financial statements. D) A line item on the financial statements. Answer: A Difficulty: 1 Easy Topic: Conceptual Framework-Providing Useful Financial Reports Learning Objective: 02-01 Describe the concepts related to the financial reporting requirements of the GASB reporting model. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 35) Which of the following is not one of the methods recommended by the GASB Concepts Statement 3 for communicating information to external users of government financial reports? A) Providing a popular report. B) Recognition in the financial statements. C) Presentation as required supplementary information. D) Disclosure in the notes to the financial statements. Answer: A Difficulty: 1 Easy Topic: Conceptual Framework-Providing Useful Financial Reports Learning Objective: 02-01 Describe the concepts related to the financial reporting requirements of the GASB reporting model. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 11

36) Which of the following activities is considered a core government activity? A) Finance and budget. B) Central purchasing. C) Culture and recreation. D) Employee pension fund. Answer: C Difficulty: 1 Easy Topic: Activities of Government Learning Objective: 02-02 Explain the nature of the three major activity categories of a state or local government: governmental activities, business-type activities, and fiduciary activities. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 37) Which of the following is true regarding financial reporting for internal service funds? A) Internal service funds are reported in the governmental fund financial statements. B) Internal service funds are aggregated and reported as a major fund in the proprietary fund financial statements. C) Internal service funds are generally reported in the Business-type Activities column of the government-wide financial statements. D) Internal service funds are generally reported in the Governmental Activities column of the government-wide financial statements. Answer: D Difficulty: 1 Easy Topic: Financial Reporting Model Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

38) Which of the following is not a characteristic of a fund as defined by GASB standards? A) An accounting entity. B) A fiscal entity. C) A reporting entity. D) A self-balancing set of accounts. Answer: C Difficulty: 1 Easy Topic: Fund Reporting Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 39) In accounting for state and local governments the modified accrual basis is required for A) Proprietary and fiduciary funds. B) Governmental funds. C) Governmental and fiduciary funds. D) Governmental and internal service funds. Answer: B Difficulty: 1 Easy Topic: Financial Reporting Model Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

40) Under the modified accrual basis of accounting, revenues should be recognized when A) Earned. B) Collected in cash. C) Authorized by the budget ordinance. D) Measurable and available. Answer: D Difficulty: 1 Easy Topic: Fund Reporting Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 41) Which of the following funds is a governmental fund-type? A) Private-purpose trust fund. B) Internal service fund. C) Permanent fund. D) Enterprise fund. Answer: C Difficulty: 1 Easy Topic: Fund Reporting Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

42) Financial resources set aside to pay principal and interest on general long-term debt may be accounted for in which of the following fund types? A) Private-purpose trust fund. B) Debt service fund. C) Principal and interest trust fund. D) Internal service fund. Answer: B Difficulty: 1 Easy Topic: Fund Reporting Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 43) Which of the following is a proprietary fund? A) Special revenue fund. B) Investment trust fund. C) Debt service fund. D) Internal service fund. Answer: D Difficulty: 1 Easy Topic: Financial Reporting Model Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

44) Which of the following is a fiduciary fund? A) Investment trust fund. B) Special revenue fund. C) Debt service fund. D) Enterprise fund. Answer: A Difficulty: 1 Easy Topic: Fund Reporting Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 45) Which of the following funds would be most appropriate when accounting for an activity that provides goods or services to the public for a fee that is intended to make the activity self-supporting? A) Investment trust fund. B) Enterprise fund. C) Internal service fund. D) Special revenue fund. Answer: B Difficulty: 2 Medium Topic: Fund Reporting Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

46) Which of the following funds should be used if resources provided by a federal grant must be segregated and used for counseling of youthful offenders? A) Private-purpose trust fund. B) Enterprise fund. C) Internal service fund. D) Special revenue fund. Answer: D Difficulty: 2 Medium Topic: Fund Reporting Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 47) Which of the following funds would be used to account for an activity that provides centralized purchasing and sales of goods or services to other departments or agencies of the government on a cost-reimbursement basis? A) Enterprise fund. B) Fiduciary fund. C) Internal service fund. D) Permanent fund. Answer: C Difficulty: 2 Medium Topic: Fund Reporting Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

48) Which of the following funds would record depreciation of capital assets? A) Special revenue fund. B) Permanent fund. C) Internal service fund. D) Custodial fund. Answer: C Difficulty: 2 Medium Topic: Fund Reporting Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 49) Capital assets used by departments accounted for by the General Fund of a governmental unit should be accounted for in A) The General Fund. B) The governmental activities journal. C) The business-type activities journal. D) The general capital assets fund. Answer: B Difficulty: 1 Easy Topic: Financial Reporting Model Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

50) Capital assets used by an enterprise fund should be accounted for in the A) Enterprise fund and depreciation on the capital assets should be recorded. B) Business-type activities journal but no depreciation on the capital assets should be recorded. C) Governmental activities journal and depreciation on the capital assets should be recorded. D) Enterprise fund but no depreciation on the capital assets should be recorded. Answer: A Difficulty: 1 Easy Topic: Fund Reporting Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 51) Which of the following funds are proprietary funds? A) Enterprise funds, investment trust funds, pension trust funds, and the General Fund. B) Enterprise funds and internal service funds. C) Internal service funds, special revenue funds, and enterprise funds. D) Proprietary funds are not used in governmental accounting. Answer: B Difficulty: 1 Easy Topic: Financial Reporting Model Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

52) Which of the following funds are governmental funds? A) General Fund, special revenue funds, capital projects funds, debt service funds, and private-purpose trust funds. B) General Fund, special revenue funds, private-purpose trust funds. C) General Fund, special revenue funds, debt service funds, capital projects funds, and permanent funds. D) General Fund, special revenue funds, capital projects funds, debt service funds, and internal service funds. Answer: C Difficulty: 1 Easy Topic: Fund Reporting Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 53) The activities of a water utility department, which offers its services to the general public on a user charge basis, should be accounted for in A) An enterprise fund. B) A special revenue fund. C) The General Fund. D) An internal service fund. Answer: A Difficulty: 2 Medium Topic: Fund Reporting Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

54) The measurement focus and basis of accounting that are most unlike those used by business entities are those used by A) Governmental funds. B) Fiduciary funds. C) Proprietary funds. D) Contribution funds. Answer: A Difficulty: 2 Medium Topic: Financial Reporting Model Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 55) Which of the following governmental funds must be reported as a major fund? A) The General Fund. B) Any fund with total assets, liabilities, revenues, or expenditures that are 10% or more of the General Fund and 5% or more of total General Fund and Business-type Activities. C) The government may opt to include or exclude any fund it choses as a major fund. D) Only the General Fund and special revenue funds that meet the 10% and 5% size criteria. Answer: A Difficulty: 1 Easy Topic: Fund Reporting Learning Objective: 02-04 Discuss the nature of major fund reporting and the criteria used to determine whether a fund should be reported as a major fund. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

56) The basis of accounting that should be used in preparing fund financial statements is: Governmental funds A) Modified accrual B) Modified accrual C) Modified accrual D) Accrual A) Choice A B) Choice B C) Choice C D) Choice D

Proprietary funds Accrual Modified accrual Accrual Accrual

Fiduciary funds Modified accrual Modified accrual Accrual Accrual

Answer: C Difficulty: 1 Easy Topic: Financial Reporting Model Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 57) A major governmental fund is one that has one or more elements (e.g., assets, liabilities, revenues, or expenditures) that is at least: A) Five percent of the corresponding element(s) of total governmental funds and 10 percent of the corresponding element(s) of total governmental and enterprise funds combined. B) Ten percent of the corresponding element(s) of total governmental funds and 10 percent of the corresponding element(s) of total governmental and enterprise funds combined. C) Five percent of the corresponding element(s) of total governmental funds and five percent of the corresponding element(s) of total governmental and enterprise funds combined. D) Ten percent of the corresponding element(s) of total governmental funds and 5 percent of the corresponding element(s) of total governmental and enterprise funds combined. Answer: D Difficulty: 1 Easy Topic: Fund Reporting Learning Objective: 02-04 Discuss the nature of major fund reporting and the criteria used to determine whether a fund should be reported as a major fund. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

58) A city received resources that the state indicates can only be used for public works projects, such as road construction. Assuming the resources have not been expended by year end, how would the resources the city received be shown in the city's fund balances? A) Designated Fund Balance. B) Committed Fund Balance. C) Restricted Fund Balance. D) Assigned Fund Balance. Answer: C Difficulty: 2 Medium Topic: Fund Reporting Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 59) Which of the following would be reported as a nonspendable fund balance? A) Inventory. B) Restricted assets. C) Assets whose use is limited. D) Capital assets. Answer: A Difficulty: 2 Medium Topic: Fund Reporting Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

60) Under GASB standards which of the following funds can report a positive amount for unassigned fund balance? A) Capital projects fund. B) Special revenue fund. C) General Fund. D) All of the options. Answer: C Difficulty: 2 Medium Topic: Fund Reporting Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 61) Use the following information to determine whether the Development Special Revenue and the Debt Service Funds should be reported as major funds based on asset amounts provided. Development Special Revenue Fund Assets Debt Service Fund Assets Total Governmental Fund Assets Total Governmental Fund and Enterprise Fund Assets

$ 740,000 $ 150,000 $ 7,500,000 $ 8,750,000

A) The Development Special Revenue Fund should be reported as major. B) The Debt Service Fund should be reported as major. C) Both the Development Special Revenue Fund and the Debt Service Fund should be reported as major. D) Neither the Development Special Revenue Fund nor the Debt Service Fund should be reported as major. Answer: D Difficulty: 3 Hard Topic: Fund Reporting Learning Objective: 02-04 Discuss the nature of major fund reporting and the criteria used to determine whether a fund should be reported as a major fund. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

62) Which of the following is not one of the seven elements defined by the GASB concept statements? A) Deferred inflow of resources. B) Expenses. C) Assets. D) Net position. Answer: B Difficulty: 1 Easy Topic: Conceptual Framework-Providing Useful Financial Reports Learning Objective: 02-01 Describe the concepts related to the financial reporting requirements of the GASB reporting model. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 63) The GASB concept statements indicate that in certain instances a remeasured value for an asset or liability should be reported on the financial statements. Which of the following is not one of the methods recommended by the GASB for remeasured amounts? A) Historical cost. B) Lower of cost or market. C) Fair value. D) Replacement cost. Answer: B Difficulty: 1 Easy Topic: Conceptual Framework-Providing Useful Financial Reports Learning Objective: 02-01 Describe the concepts related to the financial reporting requirements of the GASB reporting model. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

64) The GASB recommends that budget-to-actual comparison information be provided as which of the following? A) A stand-alone financial statement. B) A schedule in the notes to the financial statements. C) As a part of the basic financial statements. D) As a required supplementary information schedule. Answer: D Difficulty: 1 Easy Topic: Fund Reporting Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 65) The GASB requires budget-to-actual comparison information for which of the following? A) The General Fund. B) All governmental funds. C) The General Fund and major special revenue funds with legally adopted budgets. D) All special revenue, debt service and capital projects funds with legally adopted budgets. Answer: C Difficulty: 1 Easy Topic: Fund Reporting Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

66) For each of the following descriptive phrases, indicate the type of fund from the list. A. Governmental funds B. Proprietary funds C. Fiduciary funds 1. Includes permanent funds held in trust to be used for public purposes 2. Sometimes referred to as self-supporting or business-like funds 3. Any fund held by a government in a custodial or trustee relationship for an external party 4. Used when the government collects taxes or amounts to be invested for external parties 5. Enterprise and internal service funds Answer: 1. A, 2. B, 3. C, 4. C, 5. B Explanation: No further explanation details are available for this problem. Difficulty: 1 Easy Topic: Fund Reporting Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

67) For each of the following scenarios, indicate how they would be classified for fund balance reporting purposes using the classification list. A. B. C. D. E.

Nonspendable Restricted Committed Assigned Unassigned

1. Bond proceeds of $15,000,000 that must be used for construction of a fire substation remain unspent at the end of the fiscal year. 2. Prepaid rent of $6,000 remains at the end of the fiscal year. 3. The city council adopted a plan to set aside 2% of revenues over the next three years to help build cash reserves. At the end of the fiscal year 2% of the revenues were set aside. 4. The state transportation department provided $1,000,000 in state funds to be used for street widening. At the end of the fiscal year $750,000 remained unspent. 5. The county received a $3,000,000 endowment during the year. Answer: 1. B, 2. A, 3. D, 4. B, 5. A Explanation: No further explanation details are available for this problem. Difficulty: 3 Hard Topic: Fund Reporting Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

68) Following are some of the county's governmental funds. The county has asked you to determine is any of the funds listed should be classified as major funds based on the GASB size criteria. Clearly indicate which fund(s) you believe should be classified as major and provide support for your choice(s).

Assets Liabilities Revenues Expenditures/ Expenses

Special Debt Total of all Total of all General Revenue Service Governmental Governmental & Fund Fund Fund Funds Enterprise Funds 12,000,000 1,000,000 500,000 15,000,000 21,000,000 3,000,000 250,000 30,000 4,580,000 5,890,000 10,000,000 600,000 1,450,000 13,770,000 17,123,000 9,859,000

725,000 1,300,000

13,460,000

16,665,000

Answer: Debt Service Fund – The size criteria states that a fund must be at least 10% of the total of all governmental funds for at least one of the elements (assets, liabilities, revenues, expenditures/expenses), and it must be at least 5% of the total of all governmental funds and enterprise funds for the same element. The debt service fund meets the size criteria for revenues since 10% of the total of all governmental funds is $1,377,000 and 5% of the total of all governmental and enterprise funds is $856,150, both of which the debt service fund exceeds. (The thresholds for the other three elements are: assets—10% is $1,500,000, 5% is $1,050,000; liabilities—10% is $458,000, 5% is $294,500; expenditures/expenses—10% is $1,346,000, 5% is $833,250.) General Fund – the General Fund is always classified as a major fund and it meets the size criteria for all of the elements. Difficulty: 3 Hard Topic: Fund Reporting Learning Objective: 02-04 Discuss the nature of major fund reporting and the criteria used to determine whether a fund should be reported as a major fund. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Measurement

69) List the basic financial statements required by GASB standards and briefly explain their purposes. Answer: The basic financial statements include two government-wide financial statements, seven fund financial statements, and notes thereto. The government-wide statements are a statement of net position and statement of activities designed to report on the operational accountability of the government as a whole. The fund financial statements that follow are designed to report on the government's fiscal accountability for spending according to legal budgets, laws, and agreements with resource providers. A balance sheet and statement of revenues, expenditures, and changes in fund balance are required for governmental-type funds, as well as a reconciliation of the change in fund balances to change in net position at the government-wide level. A statement of net position; a statement of revenues, expenses, and changes in fund net position; and statement of cash flows are required for proprietary-type funds. A statement of net position and statement of changes in net position are required for fiduciary funds. Difficulty: 1 Easy Topic: Financial Reporting Model Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Remember AACSB: Communication AICPA: FN Reporting 70) "The primary purpose of an accounting system for a state or a local government is to make it possible for financial statements to demonstrate compliance with finance-related legal and contractual provisions." Explain why you believe this statement to be correct or incorrect. Answer: The statement is not correct. The GASB specifies that a governmental accounting system must make it possible both to prepare statements in conformity with GAAP and to prepare legal compliance reports. The former are the basic financial statements on which auditors express an opinion; the latter are special purpose reports that may or may not be accompanied by auditors' reports. Difficulty: 2 Medium Topic: Fund Reporting Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Understand AACSB: Communication AICPA: FN Reporting

71) Explain the difference between measurement focus and basis of accounting. Also, explain the difference between the economic resources measurement focus and the current financial resources measurement focus as well as the difference between the accrual and modified accrual bases of accounting. Which funds and government-wide activities use each focus and each basis? Answer: Measurement focus describes what is measured; that is, the nature of the resources, claims against resources, and flows of resources that are measured and reported by a fund or activity. The basis of accounting describes when things are measured. The economic resources measurement focus reports on the balances and flows of both current and noncurrent assets and liabilities, whereas the current financial resources focus reports only on the balances and flows of current assets and liabilities. The accrual basis of accounting recognizes revenues when earned and expenses when incurred, where the modified accrual basis recognizes revenues when measurable and available for current spending and expenditures when a current liability has been incurred. Governmental funds use the current financial resources measurement focus, and proprietary and fiduciary funds use the economic resources measurement focus. Governmental funds use the modified accrual basis of accounting. Proprietary and fiduciary funds use the accrual basis of accounting. Governmental and business-type activities at the government-wide level report on net position and activities using the economic resources measurement focus and the accrual basis of accounting. Difficulty: 2 Medium Topic: Fund Reporting Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Understand AACSB: Communication AICPA: FN Reporting

72) List the seven fund financial statements that are required as part of the basic financial statements by GASB standards. What measurement focus and basis of accounting should be used in preparing each of these statements? Answer: These seven fund statements are required in the basic financial statements (assuming that an entity has funds in each of the three fund types): Balance sheet—governmental funds Statement of revenue, expenditures, and changes in fund balances—governmental funds Statement of net position—proprietary funds Statement of revenues, expenses, and changes in fund net position—proprietary funds Statement of cash flows—proprietary funds Statement of fiduciary net position Statement of changes in fiduciary net position In addition, a reconciliation of (1) the total fund balance of governmental funds from the balance sheet—governmental funds to the governmental activities net position from the government-wide statement of net position, and (2) the change in total fund balances of governmental funds from the statement of revenue, expenditures, and changes in fund balances—governmental funds to the change in governmental activities net position from the government-wide statement of activities, are required on the face of the financial statements or as separate schedules. The governmental funds are accounted for using the current financial resources measurement focus and modified accrual basis of accounting. The proprietary and fiduciary funds are accounted for using the economic resources measurement focus and accrual basis of accounting (except for certain liabilities of defined benefit pension plans and related postemployment healthcare plans). Difficulty: 1 Easy Topic: Financial Reporting Model Learning Objective: 02-03 Explain the Governmental Accounting Standards Board's (GASB) integrated accounting and financial reporting model, including: Government-wide financial statements; Fund financial statements; Definition of fund and principles of fund accounting; Types of funds in each fund category and characteristics of each fund type. Bloom's: Remember AACSB: Communication AICPA: FN Reporting

73) Explain the nature of the three major activity categories of a state or local government: governmental activities, business-type activities, and fiduciary activities. Provide examples of each. Answer: Governmental activities are those core governmental services, together with general administrative support. Examples include public safety, public works (e.g., road and bridge maintenance), parks and recreation, cultural, and social services. Business-type activities are those that are self-supporting through user charges for services they provide, although operating subsidies from general tax revenues are not uncommon. Typical examples include public utilities, such as water and sewer, transportation systems, golf courses, and swimming pools. Fiduciary activities are those in which the government acts in a fiduciary capacity, either as an agent or trustee, for parties outside the government. Examples include trust funds that benefit individuals and organizations outside of the government. Difficulty: 2 Medium Topic: Activities of Government Learning Objective: 02-02 Explain the nature of the three major activity categories of a state or local government: governmental activities, business-type activities, and fiduciary activities. Bloom's: Understand AACSB: Communication AICPA: FN Reporting

Accounting for Governmental and Nonprofit Entities, 18e (Reck) Chapter 3 Governmental Operating Statement Accounts; Budgetary Accounting 1) The government-wide statement of net position displays the net expense or revenue for each function or program of the government. Answer: FALSE Difficulty: 1 Easy Topic: Reporting of expenses and revenues at the government-wide level Learning Objective: 03-01 Describe how operating revenues and expenses related to governmental activities are reported in the government-wide statement of activities. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 2) Program revenues are distinguished from general revenues on the government-wide statement of activities under GASB standards. Answer: TRUE Difficulty: 1 Easy Topic: Reporting of expenses and revenues at the government-wide level Learning Objective: 03-01 Describe how operating revenues and expenses related to governmental activities are reported in the government-wide statement of activities. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 3) Three categories of program revenues are reported in the statement of activities: charges for services, operating grants and contributions, and capital grants and contributions. Answer: TRUE Difficulty: 1 Easy Topic: Reporting of expenses and revenues at the government-wide level Learning Objective: 03-01 Describe how operating revenues and expenses related to governmental activities are reported in the government-wide statement of activities. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

4) All purchases of goods and services and all interfund transfers of the General Fund are recorded as Expenditures. Answer: FALSE Difficulty: 1 Easy Topic: Structure and characteristics of the General Fund and other governmental funds Learning Objective: 03-02 Distinguish, in governmental funds, between Revenues and Other Financing Sources and between Expenditures and Other Financing Uses. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 5) Interfund transfers are shown as general revenues on the government-wide statement of activities. Answer: FALSE Difficulty: 1 Easy Topic: Reporting of expenses and revenues at the government-wide level Learning Objective: 03-01 Describe how operating revenues and expenses related to governmental activities are reported in the government-wide statement of activities. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 6) Contributions to permanent funds are shown on a separate line below the general revenues on the government-wide statement of activities. Answer: TRUE Difficulty: 1 Easy Topic: Reporting of expenses and revenues at the government-wide level Learning Objective: 03-01 Describe how operating revenues and expenses related to governmental activities are reported in the government-wide statement of activities. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

7) On the government-wide statement of activities, depreciation expense for assets that essentially benefit all functions, such as the city hall, may be reported as a separate line item or on the same line as the General Government or similar function. Answer: TRUE Difficulty: 1 Easy Topic: Reporting of expenses and revenues at the government-wide level Learning Objective: 03-01 Describe how operating revenues and expenses related to governmental activities are reported in the government-wide statement of activities. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 8) Other financing sources and uses are disclosed in a separate section below expenditures on the statement of revenues, expenditures, and changes in fund balances. Answer: TRUE Difficulty: 1 Easy Topic: Structure and characteristics of the General Fund and other governmental funds Learning Objective: 03-02 Distinguish, in governmental funds, between Revenues and Other Financing Sources and between Expenditures and Other Financing Uses. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 9) Expenses represent the costs to purchase goods or services, whereas expenditures represent the costs of goods or services consumed or expired during the period. Answer: FALSE Difficulty: 1 Easy Topic: Structure and characteristics of the General Fund and other governmental funds Learning Objective: 03-02 Distinguish, in governmental funds, between Revenues and Other Financing Sources and between Expenditures and Other Financing Uses. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 10) Other financing sources increase fund balance in the same manner as revenues. Answer: TRUE Difficulty: 1 Easy Topic: Structure and characteristics of the General Fund and other governmental funds Learning Objective: 03-02 Distinguish, in governmental funds, between Revenues and Other Financing Sources and between Expenditures and Other Financing Uses. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 3

11) Budgetary accounts used in the General Fund include Estimated Revenues, Estimated Other Financing Sources, Appropriations, Estimated Other Financing Uses, and Encumbrances. Answer: TRUE Difficulty: 1 Easy Topic: Reporting budgeted and actual results Learning Objective: 03-03 Discuss budgetary reporting. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 12) All encumbrances must be closed at year-end. Answer: FALSE Difficulty: 1 Easy Topic: Reporting budgeted and actual results Learning Objective: 03-03 Discuss budgetary reporting. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 13) An encumbrance represents the estimated future liability for goods or services resulting from placing a purchase order or signing a contract. Answer: TRUE Difficulty: 1 Easy Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 14) GASB standards require that all state and local governments present a statement of revenues, expenditures, and changes in fund balances—budget and actual for the General Fund and major special revenue funds for which annual budgets have been legally adopted. Answer: FALSE Difficulty: 2 Medium Topic: Reporting budgeted and actual results Learning Objective: 03-03 Discuss budgetary reporting. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 4

15) Available means that a revenue or other financing source is expected to be collected during the current fiscal period or within one month of the fiscal year end. Answer: FALSE Difficulty: 1 Easy Topic: Terminology and classification for budgetary and operating statement accounts Learning Objective: 03-04 Explain how budgetary and operating statement accounts are classified in the governmental funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 16) The legal level of budgetary control represents the administrative level at which expenditures may not exceed appropriations without a formal budgetary amendment. Answer: TRUE Difficulty: 1 Easy Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 17) "Available appropriation" is calculated as the difference between appropriations and the sum of expenditures and encumbrances. Answer: TRUE Difficulty: 1 Easy Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

18) When goods for which an encumbrance has been recorded are received at an invoiced amount that varies from the amount encumbered, the encumbrance is reversed in the amount of the actual invoiced cost of the goods. Answer: FALSE Difficulty: 1 Easy Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 19) An allotment may be described as an internal allocation of funds on a periodic basis usually agreed upon by the department heads and the chief executive. Answer: TRUE Difficulty: 2 Medium Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 20) In the GASB reporting model, extraordinary items and special items must be reported as separate line items below General Revenues in the statement of activities to distinguish these nonrecurring items from normal recurring general revenues. Answer: TRUE Difficulty: 1 Easy Topic: Reporting of expenses and revenues at the government-wide level Learning Objective: 03-01 Describe how operating revenues and expenses related to governmental activities are reported in the government-wide statement of activities. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

21) The numerical difference between (1) current assets and deferred outflows and (2) current liabilities and deferred inflows recorded in governmental funds is denoted as net position. Answer: FALSE Difficulty: 1 Easy Topic: Structure and characteristics of the General Fund and other governmental funds Learning Objective: 03-02 Distinguish, in governmental funds, between Revenues and Other Financing Sources and between Expenditures and Other Financing Uses. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 22) Encumbrance accounting is required in the accounting for payroll of governmental funds. Answer: FALSE Difficulty: 1 Easy Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 23) When an activity accounted for by the General Fund results in issuance of purchase orders or contracts for goods or services a record must be kept, but no journal entries in the General Fund are necessary. Answer: FALSE Difficulty: 2 Medium Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

24) Any balance in Encumbrances Outstanding that remains at the end of the fiscal year is reported as a line item under Fund Balances on the governmental funds balance sheet. Answer: FALSE Difficulty: 2 Medium Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 25) At the end of the fiscal year Encumbrances is closed to Budgetary Fund Balance with a credit. Answer: FALSE Difficulty: 2 Medium Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 26) Public school systems tend to follow the revenue and expenditure classifications of the National Center for Education Statistics rather than the GASB classifications. Answer: TRUE Difficulty: 1 Easy Topic: Accounting for public school systems Learning Objective: 03-06 Explain the classification of revenues and expenditures of a public school system. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

27) The fund classification system used by public schools follows the GASB standards. Answer: TRUE Difficulty: 1 Easy Topic: Accounting for public school systems Learning Objective: 03-06 Explain the classification of revenues and expenditures of a public school system. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 28) Public school systems prepare their financial reports in accordance with the requirements of the National Center for Education Statistics. Answer: FALSE Difficulty: 1 Easy Topic: Accounting for public school systems Learning Objective: 03-06 Explain the classification of revenues and expenditures of a public school system. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 29) Which of the following best describes the recommended format for the government-wide statement of activities? A) Program revenues minus expenses minus other revenues and expenses equals change in net position. B) Program revenues plus general revenues minus expenses equals change in net position. C) Program revenues minus expenses plus general revenues equals change in net position. D) Expenses minus program revenues plus general revenues equals change in net position. Answer: D Difficulty: 1 Easy Topic: Reporting of expenses and revenues at the government-wide level Learning Objective: 03-01 Describe how operating revenues and expenses related to governmental activities are reported in the government-wide statement of activities. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

30) Which of the following statements is not a true statement about expenses that are directly related to a government function or program? A) They are reported in the government-wide statement of activities at the government-wide level. B) They include expenses that are specifically associated with a function or program. C) They include interest on general long-term liabilities. D) They include depreciation expense on capital assets that are clearly identified with a function or program. Answer: C Difficulty: 1 Easy Topic: Reporting of expenses and revenues at the government-wide level Learning Objective: 03-01 Describe how operating revenues and expenses related to governmental activities are reported in the government-wide statement of activities. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 31) Which of the following is not a category of program revenue reported on the statement of activities at the government-wide level? A) General program revenues. B) Charges for services. C) Operating grants and contributions. D) Capital grants and contributions. Answer: A Difficulty: 1 Easy Topic: Reporting of expenses and revenues at the government-wide level Learning Objective: 03-01 Describe how operating revenues and expenses related to governmental activities are reported in the government-wide statement of activities. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

32) Extraordinary items and special items are reported on the government-wide statement of activities. A) With normal recurring general revenues. B) As separate line items in the Function/Programs section of the statement of activities. C) As separate line items below General Revenues in the statement of activities. D) As separate line items above General Revenues. Answer: C Difficulty: 2 Medium Topic: Reporting of expenses and revenues at the government-wide level Learning Objective: 03-01 Describe how operating revenues and expenses related to governmental activities are reported in the government-wide statement of activities. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 33) Which of the following items would not appear in a statement of revenues, expenditures, and changes in fund balances prepared for a governmental fund? A) Depreciation expense. B) Interfund transfers in. C) Revenues from property taxes. D) Expenditures for employee salaries. Answer: A Difficulty: 1 Easy Topic: Structure and characteristics of the General Fund and other governmental funds; Governmental Fund Revenues and Expenditures Learning Objective: 03-02 Distinguish, in governmental funds, between Revenues and Other Financing Sources and between Expenditures and Other Financing Uses. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 34) Which of the following would always be classified as a general revenue? A) Grant proceeds. B) Special assessment charges for snow removal. C) Library fines. D) Fuel taxes earmarked for maintenance of roads and bridges. Answer: D Difficulty: 2 Medium Topic: Reporting of expenses and revenues at the government-wide level Learning Objective: 03-01 Describe how operating revenues and expenses related to governmental activities are reported in the government-wide statement of activities. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 11

35) The cost to purchase a good or service is the definition of an A) Expenditure. B) Expense. C) Other financing use. D) Interfund transfer out. Answer: A Difficulty: 1 Easy Topic: Structure and characteristics of the General Fund and other governmental funds Learning Objective: 03-02 Distinguish, in governmental funds, between Revenues and Other Financing Sources and between Expenditures and Other Financing Uses. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 36) Which of the following would not appear on a governmental fund balance sheet? A) Accounts receivable. B) Inventory. C) Vouchers payable. D) Bonds payable. Answer: D Difficulty: 2 Medium Topic: Structure and characteristics of the General Fund and other governmental funds Learning Objective: 03-02 Distinguish, in governmental funds, between Revenues and Other Financing Sources and between Expenditures and Other Financing Uses. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 37) When the budget for the General Fund is recorded, the required journal entry will include: A) A credit to Estimated Revenues. B) A debit to Encumbrances. C) A credit to Appropriations. D) A credit to Fund Balance. Answer: C Difficulty: 1 Easy Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 12

38) When the budget of a government is recorded and Appropriations exceeds Estimated Revenues, the Budgetary Fund Balance account is: A) Credited at the beginning of the year and debited at the end of the year. B) Credited at the beginning of the year and no entry is made at the end of the year. C) Debited at the beginning of the year and no entry is made at the end of the year. D) Debited at the beginning of the year and credited at the end of the year. Answer: D Difficulty: 1 Easy Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 39) Which of the following accounts is a budgetary account of a governmental fund? A) Encumbrances. B) Appropriations. C) Expenditures. D) Other Financing Sources. Answer: B Difficulty: 1 Easy Topic: Reporting budgeted and actual results Learning Objective: 03-03 Discuss budgetary reporting. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 40) The Estimated Revenues control account of a government is credited when: Budgetary accounts are closed A) Yes B) No C) No D) Yes A) Choice A. B) Choice B. C) Choice C. D) Choice D.

Revenues are recorded No No Yes Yes

Answer: A Difficulty: 2 Medium 13

Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 41) Under the modified accrual basis of accounting used by the General Fund, financial resources are considered available if the revenue or other financing source is expected to be collected A) Within 60 days after year-end. B) Within 90 days after year-end. C) During the current fiscal period. D) During the current fiscal period or soon enough after year-end to pay current period obligations. Answer: D Difficulty: 2 Medium Topic: Terminology and classification for budgetary and operating statement accounts Learning Objective: 03-04 Explain how budgetary and operating statement accounts are classified in the governmental funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 42) Which of the following accounts of a government is credited when a purchase order is approved? A) Encumbrances. B) Encumbrances Outstanding. C) Vouchers Payable. D) Appropriations. Answer: B Difficulty: 1 Easy Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

43) The Expenditures control account of a government is debited when: A) The supplies budget is recorded. B) Supplies are ordered. C) Supplies previously encumbered are received. D) The invoice for supplies is paid. Answer: C Difficulty: 1 Easy Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 44) Which of the following is true regarding other financing sources and other financing uses? A) Both must be reported separately from revenues and expenditures in the statement of revenues, expenditures, and changes in fund balances. B) These terms are used to distinguish program revenues or expenses from general revenues or expenses. C) These terms are used for minor revenue or expenditure items that are peripheral to the government's mission. D) Other financing sources are equivalent to gains and other financing uses are equivalent to losses. Answer: A Difficulty: 2 Medium Topic: Structure and characteristics of the General Fund and other governmental funds Learning Objective: 03-02 Distinguish, in governmental funds, between Revenues and Other Financing Sources and between Expenditures and Other Financing Uses. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 45) Under which basis of accounting for a government should revenues be recognized in the period when they are measurable and available? A) B) C) D) A) Choice A. B) Choice B. C) Choice C.

Accrual basis Yes No No Yes

Modified accrual basis No No Yes Yes

D) Choice D. Answer: C Difficulty: 1 Easy Topic: Terminology and classification for budgetary and operating statement accounts Learning Objective: 03-04 Explain how budgetary and operating statement accounts are classified in the governmental funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 46) The expenditure classification "Public Safety" is an example of which of the following types of classifications? A) Activity. B) Function. C) Character. D) Object. Answer: B Difficulty: 1 Easy Topic: Terminology and classification for budgetary and operating statement accounts Learning Objective: 03-04 Explain how budgetary and operating statement accounts are classified in the governmental funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 47) When supplies ordered for use in an activity accounted for in the General Fund are received at an actual price that is more than the estimated price on the purchase order, the Encumbrance account is: A) Debited for the estimated price on the purchase order. B) Credited for the estimated price on the purchase order. C) Debited for the actual price for the supplies received. D) Credited for the actual price for the supplies received. Answer: B Difficulty: 2 Medium Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 16

48) A statement of revenues, expenditures, and changes in fund balances—budget and actual is: A) Required by GAAP for the General Fund, special revenue funds, and all other governmental fund types for which an annual budget has been adopted. B) Required by GAAP for internal management reports only; not permitted for external financial reporting. C) Required by GAAP for all governmental fund types. D) Optional under GAAP, as long as a budgetary comparison schedule is presented. Answer: D Difficulty: 3 Hard Topic: Reporting budgeted and actual results Learning Objective: 03-03 Discuss budgetary reporting. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 49) The account "Interfund Transfers In" would be classified in a General Fund statement of revenues, expenditures, and changes in fund balance as a(an): A) Revenue. B) Other financing use. C) Other financing source. D) Current liability. Answer: C Difficulty: 1 Easy Topic: Structure and characteristics of the General Fund and other governmental funds Learning Objective: 03-02 Distinguish, in governmental funds, between Revenues and Other Financing Sources and between Expenditures and Other Financing Uses. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 50) The expenditure classification "City Attorney" is an example of which of the following types of classification? A) Function. B) Organization unit. C) Character. D) Program. Answer: B Difficulty: 2 Medium Topic: Terminology and classification for budgetary and operating statement accounts Learning Objective: 03-04 Explain how budgetary and operating statement accounts are classified in the governmental funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 17

51) When the budget of a government is adopted and Estimated Revenues exceed Appropriations, the excess is: A) Credited to Budgetary Fund Balance. B) Debited to Budgetary Fund Balance. C) Debited to Encumbrances Outstanding. D) Credited to Encumbrances Outstanding. Answer: A Difficulty: 2 Medium Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 52) Which of the following depict the typical order of steps in the acquisition of goods and services by an activity accounted for by the General Fund? A) Appropriation, disbursement, encumbrance, expenditure. B) Appropriation, encumbrance, expenditure, disbursement. C) Encumbrance, appropriation, expenditure, disbursement. D) Encumbrance, expenditure, appropriation, disbursement. Answer: B Difficulty: 2 Medium Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 53) When equipment that is to be used by the General Fund is received, how should it be recorded? A) Capital Asset. B) Appropriation. C) Encumbrances. D) Expenditure. Answer: D Difficulty: 2 Medium Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving 18

budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 54) The journal entry to record budgeted revenues will include: A) A debit to Estimated Revenues. B) A credit to Estimated Revenues. C) A debit to Revenues Receivable. D) Only a memorandum entry is necessary. Answer: A Difficulty: 2 Medium Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 55) The County Commission of Seminole County adopted its General Fund budget for the year ending June 30, comprising estimated revenues of $13,200,000 and appropriations of $12,900,000. Seminole County utilizes the budgetary accounts required by GASB standards. The journal entry to record budgeted appropriations will include: A) A credit to Appropriations, $12,900,000. B) A credit to Encumbrances, $12,900,000. C) A debit to Estimated Expenditures, $12,900,000. D) A credit to Budgetary Fund Balance, $12,900,000. Answer: A Difficulty: 2 Medium Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

56) One characteristic that distinguishes other financing sources from revenues is that other financing sources: A) Arise from debt issuances or interfund transfers in. B) Increase fund balances when they are closed at year-end. C) Provide financial resources for the recipient fund. D) Have a normal credit balance. Answer: A Difficulty: 3 Hard Topic: Structure and characteristics of the General Fund and other governmental funds Learning Objective: 03-02 Distinguish, in governmental funds, between Revenues and Other Financing Sources and between Expenditures and Other Financing Uses. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 57) The process by which a legal valuation is placed on taxable property is called: A) An appropriation. B) A property tax levy. C) Property assessment. D) Ad valorem determination. Answer: C Difficulty: 2 Medium Topic: Terminology and classification for budgetary and operating statement accounts Learning Objective: 03-04 Explain how budgetary and operating statement accounts are classified in the governmental funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 58) The County Commission of Canyon County adopted its General Fund budget for the year ending June 30, comprising estimated revenues of $13,200,000 and appropriations of $12,900,000. The budgeted excess of estimated revenues over appropriations will be recorded as: A) A credit to Surplus Revenues, $300,000. B) A debit to Estimated Excess Revenues, $300,000. C) A credit to Budgetary Fund Balance, $300,000. D) A memorandum entry only. Answer: C Difficulty: 2 Medium Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. 20

Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 59) When the budget for the General Fund is recorded, the required journal entry will include: A) A credit to Estimated Revenues. B) A debit to Encumbrances. C) A debit to Appropriations. D) Either a debit or credit to Budgetary Fund Balance, as appropriate. Answer: D Difficulty: 1 Easy Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 60) Which of the following accounts is not closed at the end of the reporting period? A) Deferred inflows of resources. B) Revenues. C) Expenditures. D) Other financing sources. Answer: A Difficulty: 3 Hard Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 61) The expenditure classification "Current Expenditures" is an example of which of the following types of classifications? A) Activity. B) Character. C) Function. D) Object. Answer: B 21

Difficulty: 2 Medium Topic: Terminology and classification for budgetary and operating statement accounts Learning Objective: 03-04 Explain how budgetary and operating statement accounts are classified in the governmental funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 62) Which of the following statements is true regarding the required disclosure of budgetary information? A) All budgetary disclosures should be presented in the notes to the financial statements. B) There is one specific format for presenting the budgetary comparison statement. C) Budgetary comparisons may be presented as a statement or as required supplementary information (RSI). D) The budgetary reconciliation must focus on the operating statement, but not the statement of position. Answer: C Difficulty: 2 Medium Topic: Reporting budgeted and actual results Learning Objective: 03-03 Discuss budgetary reporting. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 63) The Encumbrances control account of a city is decreased when

A) B) C) D) A) Choice A. B) Choice B. C) Choice C. D) Choice D.

Goods are ordered Yes No No Yes

Goods are received No No Yes Yes

Answer: C Difficulty: 2 Medium Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 22

64) Under the modified accrual basis of accounting, expenditures generally are not recognized until: A) They are paid in cash. B) An obligation is incurred that will be paid from currently available financial resources. C) Goods or services are ordered. D) They are approved by the legislative body. Answer: B Difficulty: 2 Medium Topic: Structure and characteristics of the General Fund and other governmental funds Learning Objective: 03-02 Distinguish, in governmental funds, between Revenues and Other Financing Sources and between Expenditures and Other Financing Uses. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 65) Which of the following fund types uses the current financial resources measurement focus and modified accrual basis of accounting? A) Enterprise fund. B) Special revenue fund. C) Investment trust fund. D) Pension trust fund. Answer: B Difficulty: 2 Medium Topic: Structure and characteristics of the General Fund and other governmental funds Learning Objective: 03-02 Distinguish, in governmental funds, between Revenues and Other Financing Sources and between Expenditures and Other Financing Uses. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 66) Which of the following will increase the fund balance of a government at the end of the fiscal year? A) The sum of revenues and other financing sources is more than the sum of expenditures and other financing uses. B) Expenditures are more than the difference between revenues and the excess of other financing sources over other financing uses. C) Revenues are less than the sum of expenditures, other financing sources, and other financing uses. D) The sum of fund balance, revenues, and other financing sources is more than the sum of expenditures and other financing uses. Answer: A Difficulty: 2 Medium Topic: Budgetary Accounting 23

Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 67) A liability is recorded in governmental funds when: A) Goods or services are ordered. B) Goods or services are received and the invoice is vouchered. C) Invoices are paid. D) The appropriation is reduced. Answer: B Difficulty: 2 Medium Topic: Terminology and classification for budgetary and operating statement accounts Learning Objective: 03-04 Explain how budgetary and operating statement accounts are classified in the governmental funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 68) Which of the following terms refers to an actual cost rather than an estimate? A) Budget. B) Encumbrance. C) Expenditure. D) Appropriation. Answer: C Difficulty: 2 Medium Topic: Terminology and classification for budgetary and operating statement accounts Learning Objective: 03-04 Explain how budgetary and operating statement accounts are classified in the governmental funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 69) For what funds do budgetary comparisons need to be presented in connection with the basic financial statements? A) General Fund. B) General Fund and all major funds. C) All governmental funds with legally adopted annual budgets. D) General Fund and major special revenue funds for which a budget is legally adopted. Answer: D Difficulty: 2 Medium 24

Topic: Reporting budgeted and actual results Learning Objective: 03-03 Discuss budgetary reporting. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 70) When computers are ordered by the mayor's office, the purchase order should be recorded in the General Fund as a debit to: A) Encumbrances. B) Equipment. C) Expenditures. D) Appropriations. Answer: A Difficulty: 2 Medium Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 71) If supplies that were ordered by a department financed by the General Fund are received at an actual price that is less than the estimated price on the purchase order, the department's available balance of appropriations for supplies will be: A) Decreased. B) Increased. C) Unaffected. D) Either a or b, depending on the department's specific budgetary control procedures. Answer: B Difficulty: 3 Hard Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

72) The Appropriations account of a governmental fund is credited when: A) The budgetary accounts are closed. B) The budget is recorded. C) Supplies are purchased. D) Expenditures are recorded. Answer: B Difficulty: 2 Medium Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 73) If a state law requires that local governments prepare General Fund and special revenue fund budgets on a basis that differs from the basis of accounting required by generally accepted accounting principles (GAAP): A) The actual amounts in the budgetary comparison schedule should be reported using the government's budgetary basis. B) The actual amounts in the budgetary comparison schedule should be reported on the GAAP basis. C) Both the budgeted and actual amounts in the budgetary comparison schedule should be reported on the GAAP basis; a separate budget-basis comparison schedule should be prepared for the appropriate state oversight body. D) Only a budgetary comparison schedule prepared for the appropriate state oversight body is required. Answer: A Difficulty: 3 Hard Topic: Reporting budgeted and actual results Learning Objective: 03-03 Discuss budgetary reporting. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 74) The Expenditures control account of a government is credited when: A) Supplies are ordered. B) Supplies previously encumbered are received. C) The budget is recorded. D) Temporary accounts are closed out at the end of the year. Answer: D 26

Difficulty: 2 Medium Topic: Structure and characteristics of the General Fund and other governmental funds Learning Objective: 03-02 Distinguish, in governmental funds, between Revenues and Other Financing Sources and between Expenditures and Other Financing Uses. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 75) The Encumbrances account is properly termed a A) Long-term liability. B) Reservation of unassigned fund balance. C) Budgetary account. D) Current liability if paid within a year; otherwise, long-term debt. Answer: C Difficulty: 2 Medium Topic: Reporting budgeted and actual results Learning Objective: 03-03 Discuss budgetary reporting. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 76) The county determined it needed to prepare a budget amendment to reflect a decrease in charges for services of $100,000 and an increase in public safety expenditures of $150,000. What will be the effect of these two adjustments on the Budgetary Fund Balance account? A) Budgetary Fund Balance will be debited $250,000. B) Budgetary Fund Balance will be credited $250,000. C) Budgetary Fund Balance will be debited $50,000. D) Budgetary Fund Balance will be credited $50,000. Answer: A Difficulty: 3 Hard Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 77) The city amended its budget to increase expected grant revenues by $500,000 and increase expected culture and recreation expenditures by $500,000. Which of the following statements concerning the budget amendment journal entry is correct? A) Estimated Revenues will be credited for $500,000. B) Appropriations will be debited for $500,000. C) There will be no adjustment to Budgetary Fund Balance. 27

D) Expenditures will be debited for $500,000. Answer: A Difficulty: 3 Hard Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 78) For each of the following expenditure items, indicate its correct classification scheme suggested by GASB standards. A. Function B. Program C. Organization unit D. Activity E. Character F. Object 1. Streetlight repair 2. City clerk 3. Salaries and wages 4. Transportation 5. Current operating expenditures Answer: 1. D, 2. C, 3. F, 4. B, 5. E Explanation: No further explanation details are available for this problem. Difficulty: 2 Medium Topic: Terminology and classification for budgetary and operating statement accounts Learning Objective: 03-04 Explain how budgetary and operating statement accounts are classified in the governmental funds. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 79) For each revenue source listed indicate its correct classification recommended by GASB standards. A. Taxes B. Licenses and permits C. Intergovernmental revenue D. Charges for services E. Fines and forfeits 28

F. Miscellaneous 1. Capital grant received by a city from a state 2. Property tax levied by city 3. Library use fees 4. Building permit Answer: 1. C, 2. A, 3. D, 4. B Explanation: No further explanation details are available for this problem. Difficulty: 2 Medium Topic: Terminology and classification for budgetary and operating statement accounts Learning Objective: 03-04 Explain how budgetary and operating statement accounts are classified in the governmental funds. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 80) The Fort Worth city council approved and adopted its fiscal year budget. The budget for the General Fund contained the following amounts: Estimated revenues Appropriations Authorized transfer to the debt service fund

$ 1,900,000 1,860,000 30,000

When the General Fund budget for the fiscal year is recorded, indicate whether each of the following accounts should be debited (D), credited (C), or is not affected (N). 1. Estimated revenues 2. Budgetary Fund balance 3. Appropriations 4. Estimated other financing uses 5. Expenditures Answer: 1. D, 2. C, 3. C, 4. C, 5. N Explanation: No further explanation details are available for this problem. Difficulty: 2 Medium Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

81) At the time items for which purchase orders had previously been issued are received, indicate whether each of the following accounts of the General Fund should be debited (D), credited (C), or is not affected (N). 1. Encumbrances 2. Encumbrances Outstanding 3. Expenditures 4. Vouchers payable 5. Appropriations Answer: 1. C, 2. D, 3. D, 4. C, 5. N Explanation: No further explanation details are available for this problem. Difficulty: 2 Medium Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 82) Indicate whether the following revenues should be classified as program revenues or general revenues on the government-wide statement of activities. 1. Unrestricted operating grants that can be used at the discretion of the city council. 2. Capital grants restricted for highway construction. 3. Charges for building inspections. 4. A special assessment for snow removal. 5. Fines and forfeits. 6. Motor vehicle fuel taxes restricted for road repair. 7. Unrestricted investment earnings. Answer: 1. General, 2. Program, 3. Program, 4. Program, 5. Program, 6. General, 7. General Explanation: No further explanation details are available for this problem. Difficulty: 2 Medium Topic: Reporting of expenses and revenues at the government-wide level Learning Objective: 03-01 Describe how operating revenues and expenses related to governmental activities are reported in the government-wide statement of activities. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

83) Define the term revenue and distinguish between revenue and other financing sources. Answer: Revenue is defined as an increase in fund financial resources other than from interfund transfers and debt issue proceeds. Other financing sources are increases in fund financial resources from interfund transfers and debt issue proceeds. Both revenue and other financing resources increase fund financial resources and fund balance when closed. Difficulty: 2 Medium Topic: Structure and characteristics of the General Fund and other governmental funds Learning Objective: 03-02 Distinguish, in governmental funds, between Revenues and Other Financing Sources and between Expenditures and Other Financing Uses. Bloom's: Understand AACSB: Communication AICPA: FN Reporting 84) Explain the difference between an expenditure and an expense. Answer: An expense represents the use, or expiration, of a resource or asset. An expenditure is the use of current financial resources or a decrease in fund financial resources other than transfers and other financing uses. Expenses are associated with the accrual basis of accounting, while expenditures are associated with the modified accrual basis of accounting. Difficulty: 2 Medium Topic: Structure and characteristics of the General Fund and other governmental funds Learning Objective: 03-02 Distinguish, in governmental funds, between Revenues and Other Financing Sources and between Expenditures and Other Financing Uses. Bloom's: Understand AACSB: Communication AICPA: FN Reporting 85) What benefits do financial statement users derive from the net (expense) revenue format used for the government-wide statement of activities? Answer: The net (expense) revenue format requires governments to distinguish between program and general revenues. When compared to specific expenses, the distinction allows financial statement users to evaluate whether specific functions or programs are self-sufficient or require general revenues to cover net costs. Difficulty: 2 Medium Topic: Reporting of expenses and revenues at the government-wide level Learning Objective: 03-01 Describe how operating revenues and expenses related to governmental activities are reported in the government-wide statement of activities. Bloom's: Remember AACSB: Communication AICPA: FN Reporting

86) How should depreciation expense be reported in the government-wide statement of activities? Answer: Depreciation expense for capital assets that are clearly identified with a function or program should be included in the expenses of that function or program. Similarly, depreciation expense for infrastructure assets should be reported as a direct expense of the function responsible for the infrastructure assets. Depreciation expense for shared assets should be allocated to functions on an appropriate basis. Depreciation expense for assets that essentially benefit all functions, such as the city hall, may be reported as a separate line item or on the same line as the General Government or similar function. If a government opts to report unallocated depreciation expense as a separate line item, it should indicate that the amount reported on that line does not include depreciation expense reported as part of direct expense of functions or programs. Difficulty: 2 Medium Topic: Reporting of expenses and revenues at the government-wide level Learning Objective: 03-01 Describe how operating revenues and expenses related to governmental activities are reported in the government-wide statement of activities. Bloom's: Remember AACSB: Communication AICPA: FN Reporting 87) How does the use of encumbrance procedures improve budgetary control over expenditures? Answer: The use of encumbrance procedures earmarks a portion of the remaining budgetary appropriation when a purchase order is issued or a contract for services is signed, thus alerting departmental officials and finance department personnel that a portion of the authorization is no longer available. Without the encumbrance, it is always possible that another purchase order or contract will be issued that could exceed the remaining available appropriation for that line item in a particular department. Difficulty: 2 Medium Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Apply AACSB: Communication AICPA: FN Reporting

88) The City of Jackson Hole adopted the following General Fund budget for the fiscal year: Estimated revenues: Taxes Intergovernmental revenues Licenses and permits Fines and forfeits Miscellaneous revenues Total estimated revenues

$ 3,000,000 1,000,000 400,000 150,000 100,000 $ 4,650,000

Appropriations: General government Public safety Public works Health and welfare Miscellaneous revenues Total appropriations

$ 1,000,000 2,000,000 950,000 850,000 50,000 $ 4,850,000

Prepare a summary general journal entry to record the adopted budget at the beginning of the fiscal year. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) Answer:

CITY OF JACKSON HOLE—JOURNAL ENTRIES GENERAL LEDGER

Debits Credits General Fund: ESTIMATED REVENUES 4,650,000 BUDGETARY FUND BALANCE 200,000 APPROPRIATIONS 4,850,000 Explanation: No further explanation details are available for this problem. Difficulty: 3 Hard Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

89) During the first month of its fiscal year, the City of Jackson Hole issued the following purchase orders and contracts: General government Public safety Public works Health and welfare Miscellaneous Total

50,000 200,000 75,000 65,000 5,000 $ 395,000

Show the summary general journal entry to record the issuance of the purchase orders and contracts. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) Answer:

CITY OF JACKSON HOLE—JOURNAL ENTRIES GENERAL LEDGER

Debits Credits General Fund: ENCUMBRANCES 395,000 ENCUMBRANCES OUTSTANDING 395,000 Explanation: No further explanation details are available for this problem. Difficulty: 3 Hard Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

90) The following information is provided about some of the Town of Truesdale's General Fund operating statement and budgetary accounts for the fiscal year ended June 30. Estimated revenues Revenues Appropriations Expenditures Estimated other financing sources Encumbrances Encumbrances outstanding Budgetary fund balance

$ 3,150,000 3,190,000 3,185,000 3,175,000 400,000 20,000 20,000 (calculate)

The Town of Truesdale will honor all of its outstanding encumbrances in the next fiscal period. Prepare the journal entry(ies) to close budgetary accounts required to be closed at the fiscal year end using the information provided. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) Answer:

TOWN OF TRUESDALE—JOURNAL ENTRIES GENERAL LEDGER

Debits Credits General Fund: APPROPRIATIONS 3,185,000 BUDGETARY FUND BALANCE 365.000 ESTIMATED REVENUES 3,150,000 ESTIMATED OTHER FINANCING SOURCES 400,000 Explanation: No further explanation details are available for this problem. Difficulty: 3 Hard Topic: Budgetary Accounting Learning Objective: 03-05 Explain how budgetary accounting contributes to achieving budgetary control over revenues and expenditures, including such aspects as: recording and revising the annual budget; accounting for revenues, encumbrances, and expenditures; closing budgetary accounts; and accounting for allotments. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

Accounting for Governmental and Nonprofit Entities, 18e (Reck) Chapter 4 Accounting for Governmental Operating Activities–Illustrative Transactions and Financial Statements 1) The government-wide statement of net position is prepared using the same measurement focus and basis of accounting as the General Fund balance sheet. Answer: FALSE Difficulty: 1 Easy Topic: Financial Statement Comparisons Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 2) The Governmental Activities column of the government-wide statement of net position reports both current and noncurrent assets and liabilities. Answer: TRUE Difficulty: 1 Easy Topic: Financial Statement Comparisons Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 3) Vehicles used by the police department should be reported in the governmental fund financial statements. Answer: FALSE Difficulty: 1 Easy Topic: General Fund Financial Statements Learning Objective: 04-03 Prepare year-end General Fund financial statements. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

4) Recording the annual budget is optional in the General Fund. Answer: FALSE Difficulty: 1 Easy Topic: Recording the Budget Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 5) Budgetary entries are not recorded at the government-wide level. Answer: TRUE Difficulty: 1 Easy Topic: Encumbrances and Purchasing Transactions Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 6) The Governmental Activities column of the statement of net position includes financial information for all funds of a government. Answer: FALSE Difficulty: 1 Easy Topic: Financial Statement Comparisons Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 7) Encumbrances Outstanding is shown on the balance sheet as a restriction on fund balance. Answer: FALSE Difficulty: 1 Easy Topic: Closing Entries Learning Objective: 04-02 Prepare General Fund closing journal entries. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

8) Governments that are temporarily short of cash but that have levied taxes expected to be collectible during the fiscal year are generally able to borrow on short-term notes known as "tax anticipation notes payable." Answer: TRUE Difficulty: 1 Easy Topic: Tax Anticipation Notes Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 9) If the actual liability for goods received in the current year differs from the estimated liability recorded when the goods were ordered in the prior year, the Encumbrances account should be credited in the amount of the estimated liability. Answer: TRUE Difficulty: 1 Easy Topic: Encumbrances and Purchasing Transactions Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 10) Under the modified accrual basis of accounting applicable to governmental fund types, property tax revenue is accrued and recorded at net realizable value. Answer: FALSE Difficulty: 1 Easy Topic: Accounting for Property Taxes Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

11) Current financial resources include cash and items such as marketable securities and receivables expected to be converted into cash in the current period or soon enough thereafter to pay current period obligations. Answer: TRUE Difficulty: 1 Easy Topic: Illustrative Journal Entries Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 12) Under GASB standards, Revenues must be credited for the total amount of the property tax levy. Answer: FALSE Difficulty: 1 Easy Topic: Accounting for Property Taxes Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 13) A contribution was received by the city for the purchase of playground equipment. The contribution would not be recognized as revenue by the permanent fund until the playground equipment has been purchased. Answer: FALSE Difficulty: 1 Easy Topic: Permanent Funds Learning Objective: 04-06 Account for transactions of a permanent fund. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

14) Property tax revenue is an example of a nonexchange revenue—one in which the government receives value without directly giving equal value in exchange. Answer: TRUE Difficulty: 1 Easy Topic: Exchange Transactions Learning Objective: 04-07 Distinguish between exchange and nonexchange transactions, and define the classifications used for nonexchange transactions. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 15) Under current GASB standards the revenue from property taxes should be recorded in the amounts collected during the current period. Answer: FALSE Difficulty: 1 Easy Topic: Accounting for Property Taxes Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 16) Estimated uncollectible tax amounts are recorded in the General Fund general journal as a reduction in revenues and in the governmental activities journal as a bad debt expense. Answer: FALSE Difficulty: 1 Easy Topic: Accounting for Property Taxes Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 17) A tourist tax that is restricted for use on maintenance projects in the historic downtown district should always be recorded as general revenues in the governmental activities journal. Answer: TRUE Difficulty: 1 Easy Topic: Special Revenue Funds Learning Objective: 04-04 Explain the purpose and characteristics of financial reporting for a special revenue fund. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 5

18) Property taxes due 75 days after the current fiscal year end would be recognized as revenues in the current fiscal year's General Fund general journal. Answer: FALSE Difficulty: 2 Medium Topic: Accounting for Property Taxes Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 19) Whenever a significant revenue source is restricted for a specific operating purpose, a special revenue fund should be established. Answer: TRUE Difficulty: 1 Easy Topic: Special Revenue Funds Learning Objective: 04-04 Explain the purpose and characteristics of financial reporting for a special revenue fund. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 20) A payment made by the General Fund to a debt service fund would not be recorded in the governmental activities journal. Answer: TRUE Difficulty: 2 Medium Topic: Interfund Activity Learning Objective: 04-05 Account for interfund and intra- and inter-activity transactions. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 21) Fines and forfeits are reported as charges for services on the government-wide statement of activities. Answer: TRUE Difficulty: 2 Medium Topic: Other Revenues Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 6

22) A payment made by a city-owned utility to the General Fund of the city in lieu of taxes is an example of a transaction that is recorded in the governmental activities journal. Answer: TRUE Difficulty: 2 Medium Topic: Services Provided by an Enterprise Fund Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 23) All amounts due to or from other funds should be eliminated in both the government-wide and fund financial statements. Answer: FALSE Difficulty: 2 Medium Topic: Services Provided by an Enterprise Fund Learning Objective: 04-03 Prepare year-end General Fund financial statements. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 24) At the end of the fiscal year, the purchases method of recording inventory adjusts the Expenditures account to reflect the amount of inventory actually used during the period. Answer: FALSE Difficulty: 2 Medium Topic: Accounting for Supplies Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 25) Permanent funds use the modified accrual basis of accounting. Answer: TRUE Difficulty: 1 Easy Topic: Permanent Funds Learning Objective: 04-06 Account for transactions of a permanent fund. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

26) An interfund transfer occurs when one fund of government pays another fund of the same government for services provided. Answer: FALSE Difficulty: 2 Medium Topic: Interfund Activity Learning Objective: 04-05 Account for interfund and intra- and inter-activity transactions. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 27) Grant funds received before time requirements are met, but after all other eligibility requirements have been met, should be reported as an asset and a deferred inflow of resources by the recipient. Answer: TRUE Difficulty: 3 Hard Topic: Nonexchange Transactions Learning Objective: 04-07 Distinguish between exchange and nonexchange transactions, and define the classifications used for nonexchange transactions. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 28) Year-end interfund receivable or payable balances will appear in the line item internal balances within their respective columns on the government-wide statement of net position. Answer: TRUE Difficulty: 2 Medium Topic: Interfund Activity Learning Objective: 04-05 Account for interfund and intra- and inter-activity transactions. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 29) Some governments choose to sell the collection rights to unpaid property taxes in tax lien public auctions and therefore will not have property tax balances reported within the financial statements. Answer: TRUE Difficulty: 2 Medium Topic: Accounting for Property Taxes Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 8

30) Encumbrance accounts need not be closed at year-end if the government is required or intends to honor the encumbrances outstanding at year-end. Answer: TRUE Difficulty: 2 Medium Topic: Closing Entries Learning Objective: 04-02 Prepare General Fund closing journal entries. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 31) Which of the following financial statement(s) reports both current and noncurrent assets and liabilities? Government-wide Statement of Net Position A) No B) No C) Yes D) Yes A) Choice A B) Choice B C) Choice C D) Choice D

General Fund Balance Sheet Yes No No Yes

Answer: C Difficulty: 1 Easy Topic: Financial Statement Comparisons Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

32) Which of the following should not be reported on the balance sheet of the General Fund? A) Equipment. B) Vouchers payable. C) Tax anticipation notes payable. D) Due from federal government. Answer: A Difficulty: 1 Easy Topic: General Fund Financial Statements Learning Objective: 04-03 Prepare year-end General Fund financial statements. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 33) When equipment is ordered by a department of the government, the purchase order should be recorded in the General Fund as a debit to: A) Appropriations. B) Equipment. C) Encumbrances. D) Expenditures. Answer: C Difficulty: 1 Easy Topic: Encumbrances and Purchasing Transactions Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 34) The receipt of equipment that had previously been ordered should be recorded in the General Fund as a debit to A) Appropriations. B) Equipment. C) Encumbrances. D) Expenditures. Answer: D Difficulty: 1 Easy Topic: Encumbrances and Purchasing Transactions Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

35) The City of Pringle purchased a vehicle for the police department. If the operations of the police department are financed by general revenues, an asset would be recorded in which journal(s)?

A) B) C) D) A) Choice A. B) Choice B. C) Choice C. D) Choice D.

Governmental Activities No No Yes Yes

General Fund Yes No No Yes

Answer: C Difficulty: 1 Easy Topic: Encumbrances and Purchasing Transactions Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 36) The Town of Loveland levied property taxes in the amount of $1,600,000. The town estimates that 1 percent will be uncollectible. The journal entry to record the tax levy will include A) A debit to Cash for $1,584,000. B) A credit to Revenues for $1,584,000. C) A debit to Allowance for Uncollectible Current Taxes for $16,000. D) A debit to Estimated Revenues for $1,600,000. Answer: B Difficulty: 1 Easy Topic: Accounting for Property Taxes Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

37) Dover City has calculated that General Fund property tax revenues of $5,640,000 are required for the current fiscal year. Over the past several years, the city has collected 94 percent of all property taxes levied. The city levied property taxes in the amount that will generate the required $5,640,000. Which of the following general journal entries would correctly record the property tax levy? A) General Journal Debit Credit Taxes Receivable—Current 5,640,000 Estimated Uncollectible Current Taxes 338,400 Revenues 5,301,600 B) General Journal Taxes Receivable—Current Estimated Uncollectible Current Taxes Revenues

Debit 6,000,000

Credit 360,000 5,640,000

C) General Journal Taxes Receivable—Current Deferred Inflows of Taxes Revenues

Debit 5,640,000

Credit 338,400 5,301,600

D) General Journal Taxes Receivable—Current Deferred Inflows of Taxes Revenues

Debit 6,000,000

Credit 360,000 5,640,000

Answer: B Difficulty: 2 Medium Topic: Accounting for Property Taxes Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

38) An interfund transfer in should be reported in a governmental fund operating statement as a(an): A) Revenue. B) Due from other funds. C) Other financing source. D) Other financing use. Answer: C Difficulty: 1 Easy Topic: Interfund Activity Learning Objective: 04-05 Account for interfund and intra- and inter-activity transactions. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 39) The General Fund has transferred cash to the appropriate fund for eventual retirement of term bonds maturing in 10 years. Which funds would record this transaction? General Fund A) Yes B) No C) Yes D) Yes A) Choice A. B) Choice B. C) Choice C. D) Choice D.

Capital Projects Fund No No No Yes

Debt Service Fund Yes Yes No Yes

Answer: A Difficulty: 2 Medium Topic: Interfund Activity Learning Objective: 04-05 Account for interfund and intra- and inter-activity transactions. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

40) A properly prepared schedule of revenues, expenditures, and changes in fund balances—budget and actual will include which of the following columns? A) Actual revenue and expenditure amounts on the GAAP basis. B) Actual revenue and expenditure amounts on the budget basis. C) Encumbrances outstanding at year-end. D) Unexpended appropriations. Answer: B Difficulty: 3 Hard Topic: General Fund Financial Statements Learning Objective: 04-03 Prepare year-end General Fund financial statements. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 41) Using the information below, what amount should be accounted for in a special revenue fund or funds? Warehouse equipment used to store supplies for delivery to all city departments and agencies on a cost-reimbursement basis $ 300,000 Equipment used for supplying electric power to residents $ 1,750,000 Receivables for completed sidewalks to be paid for in installments by affected property owners. Construction was financed by special assessment bonds for which the town has no liability $ 1,500,000 Cash received from federal government, dedicated to highway maintenance $ 1,800,000 A) $1,800,000. B) $2,100,000. C) $3,300,000. D) $5,350,000. Answer: A Difficulty: 2 Medium Topic: Special Revenue Funds Learning Objective: 04-04 Explain the purpose and characteristics of financial reporting for a special revenue fund. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

42) Which of the following would properly be reported in the operating statement of a governmental fund? A) Interest on a tax anticipation note issued and repaid during the period. B) Amortization expense. C) Depreciation expense. D) A grant that is intended to finance activities of the following period. Answer: A Difficulty: 2 Medium Topic: General Fund Financial Statements Learning Objective: 04-03 Prepare year-end General Fund financial statements. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 43) The Revenues account of a government is debited when: A) The budget is recorded at the beginning of the year. B) Property taxes are recorded. C) The account is closed to fund balance—unassigned at the end of the year. D) Property taxes are collected. Answer: C Difficulty: 2 Medium Topic: Closing Entries Learning Objective: 04-02 Prepare General Fund closing journal entries. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 44) The Estimated Revenues account of a government is debited when: A) The budget is recorded at the beginning of the year. B) Property taxes are recorded. C) The account is closed to fund balance—unassigned at the end of the year. D) Property taxes are collected. Answer: A Difficulty: 2 Medium Topic: Recording the Budget Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

45) Which of the following would be considered an internal exchange transaction? A) The General Fund transfers $200,000 to establish a Central Supplies Fund; this amount will not be repaid. B) The General Fund transfers $125,000 to the Debt Service Fund for payment of currently due bond interest payments. C) The General Fund transfers $9,000 to the Central Supplies Fund for supplies it received from Central Supplies. D) The Capital Projects Fund completes a library building project and transfers the remaining cash to the Debt Service Fund. Answer: C Difficulty: 2 Medium Topic: Interfund Activity Learning Objective: 04-05 Account for interfund and intra- and inter-activity transactions. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 46) The General Fund used electricity provided by the city-owned electric utility (an enterprise fund of the city). The General Fund general journal entry to record the transaction will include: A) A debit to Expenses. B) A debit to Expenditures. C) A debit to Interfund Transfers Out. D) A debit to Due to Other Funds. Answer: B Difficulty: 2 Medium Topic: Interfund Activity Learning Objective: 04-05 Account for interfund and intra- and inter-activity transactions. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

47) The General Fund used electricity provided by the city-owned electric utility (an enterprise fund of the city). The governmental activities journal entry to record the transaction will include: A) A debit to Expenses. B) A debit to Expenditures. C) A debit to Internal Balances. D) No entry would be recorded since the transaction is between two funds of the same government. Answer: A Difficulty: 2 Medium Topic: Interfund Activity Learning Objective: 04-05 Account for interfund and intra- and inter-activity transactions. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 48) On May 1, the City of Dustin was notified of approval of a $300,000 federal operating grant, payable on a reimbursement basis as the city expends resources for the intended purpose of the grant. As of May 1, no expenditures had been made for grant purposes. The journal entry to record approval of this grant will include: A) A credit to Revenues in the amount of $300,000. B) A credit to Deferred Inflows of Resources—Grant Proceeds in the amount of $300,000. C) A debit to Grants Receivable in the amount of $300,000. D) No journal entry will be made until expenditures for the authorized purpose occur. Answer: D Difficulty: 2 Medium Topic: Other Revenues Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

49) Vacation City was awarded a $500,000 federal operating grant for use in year 2. On December 1 of year 1, half of the grant money was received by the City. The journal entry to record receipt of the grant funds will include: A) A credit to Revenues in the amount of $250,000. B) A credit to Deferred Inflows of Resources—Grant Proceeds in the amount of $250,000. C) A debit to Grant Expenditures in the amount of $250,000. D) No journal entry will be made until expenditures are made in Year 2. Answer: B Difficulty: 3 Hard Topic: Other Revenues Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 50) Which of the following best describes the proper treatment for uncollectible amounts of taxes? A) Report as bad debt expense. B) Report as deferred inflows of resources. C) Report as bad debt expenditures. D) Report receivables net of uncollectible amounts. Answer: D Difficulty: 2 Medium Topic: Accounting for Property Taxes Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

51) Property taxes due and collectible 90 days after the 2020 fiscal year end would be recorded as revenues in 2020 in which journal? General Fund A) Yes B) No C) No D) Yes A) Choice A. B) Choice B. C) Choice C. D) Choice D.

Governmental Activities No No Yes Yes

Answer: C Difficulty: 3 Hard Topic: Accounting for Property Taxes Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 52) Cartier Village's capital expenditures during the year ended December 31 included: Equipment for village tax collector's office Police vehicles

$ 40,000 60,000

What amounts should have been recorded in the General Fund and the governmental activities journal for the increase in the equipment account during the year ended December 31? A) General Fund: $0; Governmental activities: $0 B) General Fund: $0; Governmental activities: $100,000 C) General Fund: $40,000; Governmental activities: $60,000 D) General Fund: $100,000; Governmental activities: $0 Answer: B Difficulty: 1 Easy Topic: Encumbrances and Purchasing Transactions Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

53) The City of Island Grove uses encumbrance accounting and its fiscal year ends on June 30. On May 6, a purchase order was approved and issued for supplies in the amount of $6,000. Island Grove received these supplies on June 2, and the $6,000 invoice was approved for payment. What General Fund journal entry should Island Grove make on May 6, to record the approved purchase order? Transaction General Journal A) Encumbrances Appropriations

Debits 6,000

Supplies Vouchers Payable

6,000

Encumbrances Encumbrances Outstanding

6,000

Expenditures Encumbrances

6,000

Credits 6,000

6,000

A) Choice A B) Choice B C) Choice C D) Choice D Answer: C Difficulty: 1 Easy Topic: Encumbrances and Purchasing Transactions Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

54) The City of Island Grove uses encumbrance accounting and its fiscal year ends on June 30. On May 6, a purchase order was approved and issued for supplies in the amount of $6,000. Island Grove received these supplies on June 2, and the $6,000 invoice was approved for payment. What General Fund journal entry or entries should Island Grove make on June 2, upon receipt of the supplies and approval of the invoice? Transaction General Journal A) Encumbrances Outstanding Encumbrances

Debits 6,000

Expenditures Vouchers Payable

6,000

Encumbrances Appropriations Fund Balance—Unassigned Vouchers Payable

6,000

Supplies Vouchers Payable

6,000

Appropriations Encumbrances

6,000

Supplies Vouchers Payable

6,000

Credits 6,000

6,000

6,000 6,000 6,000

6,000

A) Choice A. B) Choice B. C) Choice C. D) Choice D. Answer: A Difficulty: 2 Medium Topic: Encumbrances and Purchasing Transactions Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

55) Which of the following will require a credit to Fund Balance—Unassigned of a governmental fund when operating statement accounts are closed at the end of the year, assuming there are no other financing sources or uses? A) Revenues are less than expenditures. B) Revenues are more than expenditures. C) Revenues are more than expenditures and encumbrances. D) Revenues are less than expenditures and encumbrances. Answer: B Difficulty: 3 Hard Topic: Closing Entries Learning Objective: 04-02 Prepare General Fund closing journal entries. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 56) On July 1, the first day of its fiscal year, the Town of Eldon levied a $1,000,000 property tax which is payable in full on December 1 of the same year. On September 15, the town decided to borrow $200,000 in 90-day tax anticipation notes to cover operating expenditures until the tax revenues are collected. The journal entry on September 15 to record the issuance of tax anticipation notes will include: A) A credit to Other Financing Sources—Proceeds of Tax Anticipation Notes. B) A credit to Tax Anticipation Revenue. C) A credit to Tax Anticipation Notes Payable. D) A credit to Deferred Outflows of Resources—Tax Anticipation Notes. Answer: C Difficulty: 2 Medium Topic: Tax Anticipation Notes Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

57) The voters of the city passed an ordinance to increase their sales tax by 1/4 percent. The proceeds of the sales tax are to be used for culture and recreation. In the governmental activities journal, how would the 1/4 percent sales tax revenue be recorded? A) Program Revenue—Culture and Recreation—Sales Tax. B) Program Revenue—Culture and Recreation—Operating Grants and Contributions. C) General Revenue—Sales Tax. D) General Revenue—Culture and Recreation—Sales Tax. Answer: C Difficulty: 3 Hard Topic: Other Revenues Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 58) During January 2020 General Fund supplies ordered in the previous fiscal year and encumbered at an estimated amount of $2,000 were received at an actual cost of $2,200. The entry to record this transaction will require a debit to: A) Expenditures—2020 in the amount of $2,200. B) Expenditures—2019 in the amount of $200. C) Expenditures—2020 in the amount of $200. D) Expenditures—2019 in the amount of $2,200. Answer: C Difficulty: 3 Hard Topic: Receipt of Goods Ordered in a Prior Year Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

59) When a fire truck purchased from General Fund revenues is received, what account, if any, should have been debited in the General Fund? A) No journal entry should be made in the General Fund. B) Expenditures. C) Encumbrances. D) Equipment. Answer: B Difficulty: 2 Medium Topic: Encumbrances and Purchasing Transactions Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 60) Which of the following accounts would not be closed at the end of each fiscal year? A) Fund balance. B) Estimated revenues. C) Interfund transfers out. D) Expenditures. Answer: A Difficulty: 2 Medium Topic: Closing Entries Learning Objective: 04-02 Prepare General Fund closing journal entries. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 61) In fiscal year 2020 the "Expenditures—2019" account represents A) Excess expenditures in 2019 that will be offset against appropriations for 2020. B) Goods or services received in 2019 which the government has no record of ordering. C) Amount of expenditures for goods ordered in 2019 that were received in 2020 and chargeable to appropriations of 2019. D) The amounts of purchase orders issued in 2019 that were intended to be paid in full from appropriations for 2020. Answer: C Difficulty: 3 Hard Topic: Receipt of Goods Ordered in a Prior Year Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 24

62) If state law requires that local governments prepare General Fund and special revenue fund budgets on a basis that differs from the basis of accounting required by GAAP, then the budgetary comparison schedule or statements should A) Not be included as part of the basic financial statements. B) Be included with the actual figures presented on the budget basis and then reconciled to the GAAP basis. C) Be included with budget figures and actual figures adjusted to the GAAP basis. D) Be included as part of management's discussion and analysis (MD&A). Answer: B Difficulty: 2 Medium Topic: General Fund Financial Statements Learning Objective: 04-03 Prepare year-end General Fund financial statements. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 63) Which of the following transactions is classified as an exchange transaction? A) Property taxes. B) Fees charged by a municipal airport. C) Bequest left to the city by a wealthy citizen. D) State grant to conduct an after school program for children. Answer: B Difficulty: 2 Medium Topic: Exchange Transactions Learning Objective: 04-07 Distinguish between exchange and nonexchange transactions, and define the classifications used for nonexchange transactions. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

64) The City of Burlington borrowed $350,000 via a tax anticipation note. If the city repaid the note three months later, the General Fund entry to record the repayment and interest of $2,750 will include A) A debit to Tax Anticipation Notes Payable for $350,000. B) A debit to Expenditures for $352,750. C) A debit to Expenditures for $2,750. D) A debit to Tax Anticipation Notes Payable for $350,000 and a debit to Expenditures for $2,750. Answer: D Difficulty: 3 Hard Topic: Tax Anticipation Notes Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 65) Which of the following assets would appropriately be reported on the governmental funds balance sheet? A) Capital assets. B) Inventories. C) Unamortized debt issuance costs. D) Goodwill. Answer: B Difficulty: 2 Medium Topic: General Fund Financial Statements Learning Objective: 04-03 Prepare year-end General Fund financial statements. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 66) Which of the following would be reported on the operating statement of a governmental fund? A) The liability for the annual obligation to the employee retirement plan. B) Depreciation expense. C) Resources received for services to be provided in future periods. D) Revenue deferred from prior periods. Answer: D Difficulty: 3 Hard Topic: General Fund Financial Statements Learning Objective: 04-03 Prepare year-end General Fund financial statements. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

67) If a governmental fund issues debt to finance a capital acquisition, how should the proceeds of the debt be recorded? A) Long-term liability. B) Revenue. C) Other financing source. D) Not reported by the governmental fund; only reported at the government-wide level. Answer: C Difficulty: 2 Medium Topic: Illustrative Journal Entries Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 68) Under the modified accrual basis of accounting, revenues should be recognized when A) Realizable. B) Earned. C) Available. D) Spent. Answer: C Difficulty: 1 Easy Topic: Illustrative Journal Entries Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 69) At the end of the 2020 fiscal year the General Fund had $500 in encumbrances that remained opened into fiscal year 2021. In 2021 the encumbered goods were received at an invoiced cost of $520. How much would be recorded as the 2021 expenditure? A) $0. B) $20. C) $500. D) $520. Answer: B Difficulty: 2 Medium Topic: Receipt of Goods Ordered in a Prior Year Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 27

70) The governmental funds operating statement presents all of the following except A) Expenditures. B) Other financing sources. C) Revenues. D) Encumbrances. Answer: D Difficulty: 2 Medium Topic: General Fund Financial Statements Learning Objective: 04-03 Prepare year-end General Fund financial statements. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 71) The account Deferred Inflows of Resources—Unavailable Revenues is used in governmental funds to record A) Property taxes that are considered uncollectible. B) Property taxes that have been collected but not yet earned. C) Property taxes that will not be collected within 60 days of fiscal year end. D) All of the above property taxes could be included in Deferred Inflows of Resources—Unavailable Revenues. Answer: C Difficulty: 1 Easy Topic: Accounting for Property Taxes Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 72) Under the consumption method for recording supplies that are maintained on a perpetual inventory system, the adjusting entry made at year end would affect which of the following accounts? A) Fund Balance—Nonspendable—Inventory of Supplies. B) Fund Balance—Restricted—Inventory of Supplies. C) Expenditures. D) Inventory of Supplies. Answer: A Difficulty: 3 Hard Topic: Accounting for Supplies Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 28

73) Supplies recorded in the General Fund under the purchases method will initially include a A) Debit to Inventory of Supplies. B) Credit to Fund Balance—Restricted—Inventory of Supplies. C) Debit to Expenditures. D) Debit to Fund Balance—Restricted—Inventory of Supplies. Answer: C Difficulty: 2 Medium Topic: Accounting for Supplies Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 74) Revenues that are legally restricted for expenditure on specified operating purposes should be accounted for in special revenue funds, including A) Endowment where the investment earnings are to be used for public purposes. B) Pension trust fund revenues. C) Accumulation of resources for payment of general long-term debt principal and interest. D) Gasoline taxes to finance road repairs. Answer: D Difficulty: 2 Medium Topic: Special Revenue Funds Learning Objective: 04-04 Explain the purpose and characteristics of financial reporting for a special revenue fund. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 75) The city's electric utility fund sent $700,000 to the General Fund to help cover the city's operating costs. This transaction would be recorded in the governmental activities journal as A) Interfund transfer in. B) Internal balance. C) Revenue. D) It would not be recorded since the transaction involves two funds of the same government. Answer: A Difficulty: 3 Hard Topic: Interfund Activity Learning Objective: 04-05 Account for interfund and intra- and inter-activity transactions. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

76) Which of the following transactions is classified as an exchange transaction? A) Fees charged for use of an athletic field at a city park. B) State grant to conduct a smoking cessation program for middle school-aged youth. C) Bequest left to the city by a former mayor. D) Personal property taxes. Answer: A Difficulty: 2 Medium Topic: Exchange Transactions Learning Objective: 04-07 Distinguish between exchange and nonexchange transactions, and define the classifications used for nonexchange transactions. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 77) Which of the following types of nonexchange transactions recognize revenue when all the eligibility requirements are met? A) Voluntary nonexchange transactions. B) Imposed nonexchange transactions. C) Derived tax revenues. D) Property tax revenues. Answer: A Difficulty: 2 Medium Topic: Nonexchange Transactions Learning Objective: 04-07 Distinguish between exchange and nonexchange transactions, and define the classifications used for nonexchange transactions. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 78) Which of the following is not a program revenues classification used in the governmental activities journal and reported in the government-wide statement of activities? A) User fees. B) Capital grants and contributions. C) Charges for services. D) Operating grants and contributions. Answer: A Difficulty: 2 Medium Topic: Other Revenues Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 30

79) The county received a $10,000,000 endowment, the terms of which indicate that earnings on the endowment are to be used by health and welfare to provide medical services to low-income children. Where would the $10,000,000 be recorded? A) Special revenue fund. B) Permanent fund. C) Private-purpose trust fund. D) Public-purpose trust fund. Answer: B Difficulty: 2 Medium Topic: Permanent Funds Learning Objective: 04-06 Account for transactions of a permanent fund. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 80) The earnings on the assets of a permanent fund are to be used to support the city's library (special revenue fund). How would the earnings be recorded? A) Revenues by the permanent fund. B) Revenues by the library. C) Revenues by both the permanent fund and the library. D) Other financing source by the permanent fund. Answer: A Difficulty: 2 Medium Topic: Permanent Funds Learning Objective: 04-06 Account for transactions of a permanent fund. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

81) Select the appropriate term from the list that best matches to the definition. A. Derived tax revenues B. Exchange transactions C. Nonexchange transactions D. Imposed nonexchange transactions E. Voluntary nonexchange transactions 1. Transactions in which the donor derives no direct tangible benefits from the recipient agency 2. A classification of nonexchange transaction, such as income or sales taxes 3. A category of nonexchange transaction that includes certain grants and entitlements and most donations 4. A category of nonexchange transactions, such as property taxes and most fines and forfeitures. Answer: 1. C, 2. A, 3. E, 4. D Explanation: No further explanation details are available for this problem. Difficulty: 2 Medium Topic: Exchange and Nonexchange Transactions Learning Objective: 04-07 Distinguish between exchange and nonexchange transactions, and define the classifications used for nonexchange transactions. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

82) In what ways does the government-wide statement of net position differ from the balance sheet for governmental funds? Answer: The primary difference is that the government-wide statement of net position focuses on total economic resources, recognized on the accrual basis of accounting; whereas, the General Fund focuses on current financial resources, recognized on the modified accrual basis of accounting. For that reason, both noncurrent and current assets and liabilities are reported on the government-wide statement of net position, but only current assets and liabilities are reported on the General Fund balance sheet. Another difference is that the statement of net position aggregates all governmental activities (including General Fund, special revenue, capital projects, debt service, permanent funds, and some internal service funds) and reports those in one column, whereas the balance sheet for governmental funds presents a column for the General Fund, each major fund, and one column for all other nonmajor funds. A further difference is that the statement of net position can be presented either in the net position format (assets and deferred outflows of resources, if any, minus liabilities and deferred inflows of resources, if any, equals net position) or the traditional format (assets equals liabilities plus net position). Difficulty: 2 Medium Topic: Financial Statement Comparisons Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Understand AACSB: Communication AICPA: FN Reporting 83) Why might the property tax revenue in a given year differ between the governmental funds statement of revenues, expenditures, and changes in fund balances and the governmental activities column of the statement of activities? Answer: In any given year, the full portion of property tax revenue that is considered collectible will be recognized as revenue at the government-wide level. In the governmental funds, property tax revenue will include current year property taxes levied and considered available, which means collected during the current year or within 60 days of year-end. It will also include prior year delinquent property taxes collected more than 60 days after the previous year-end. Property taxes receivable that are not considered available are classified as deferred inflows of resources in the governmental fund financial statements. Difficulty: 2 Medium Topic: Accounting for Property Taxes Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Apply AACSB: Communication AICPA: FN Reporting

84) Why might actual revenues and expenditures reported on the schedule of revenues, expenditures, and changes in fund balances—budget and actual differ from those reported on the GAAP-basis statement of revenues, expenditures, and changes in fund balances? Answer: To facilitate a true budget and actual comparison, governments should present actual revenues and expenditures on the same basis the law requires for budget preparation. The budget basis for revenues is often the same as GAAP, but some jurisdictions may, for example, recognize revenues on the cash basis rather than modified accrual. The budget basis for expenditures often adds encumbrances to expenditures, whereas in the GAAP-basis operating statement only expenditures are reported. Consequently, budget basis expenditures will often exceed GAAP-basis expenditures by the amount of encumbrances outstanding. Difficulty: 2 Medium Topic: General Fund Financial Statements Learning Objective: 04-03 Prepare year-end General Fund financial statements. Bloom's: Apply AACSB: Communication AICPA: FN Reporting 85) Identify the four types of nonexchange transactions and discuss the rules for recognition of revenues and expenses/expenditures for each type of transaction. Answer: The four classes of nonexchange transactions are (1) derived tax revenues, (2) imposed nonexchange revenues, (3) government-mandated nonexchange transactions, and (4) voluntary nonexchange transactions. For derived tax revenues, such as sales and similar taxes, revenues should be recognized when the underlying exchange (e.g., sale of goods or services) has occurred. Revenues for imposed nonexchange revenues should be recognized when resources are required to be used or the first period that use is permitted. For both government-mandated and voluntary transactions, revenues (and expenses or expenditures for the other party) should be recognized in the period when all eligibility requirements, such as meeting matching requirements, have been met, unless received (or paid) in advance of use in a following period. If cash is received in advance of eligibility requirements having been met, the receipt should be reported as a liability. Resources received before time requirements are met, but after all other eligibility requirements have been met, should be reported as a deferred inflows of resources by the recipient. Difficulty: 3 Hard Topic: Exchange and Nonexchange Transactions Learning Objective: 04-07 Distinguish between exchange and nonexchange transactions, and define the classifications used for nonexchange transactions. Bloom's: Understand AACSB: Communication AICPA: FN Reporting

86) All revenues of the City of Capri are accounted for on the modified accrual basis. Below is shown a list of Capri's General Fund transactions of a revenue nature. State which ones should be recognized by the General Fund as a revenue in the year of occurrence. If any item is not a current revenue, state the proper treatment for that item. 1) Receipt of money from issue of tax anticipation notes. 2) Collection of taxes that had been written off in prior year. 3) Collection of current-year property taxes. 4) Collection of prior years' delinquent property taxes. 5) Receipt of money in prepayment of a property owner's next-year taxes. 6) Collection of accounts receivable for charges for services. Amount is included in deferred inflows of resources. Answer: 1) Not a revenue: increase in liabilities of this fund. 2) Current revenue: the receivable should be restored to the accounting records, then the collection item should be credited to the receivable account. Ordinarily there should be interest collected on the delinquent taxes which is revenue to the extent not previously accrued. 3) Current revenue: this collection of a receivable is related to a revenue recognized in current year at time receivable was recorded. 4) Current revenue: under modified accrual, revenue is recognized when it is measurable and available. This would be a current revenue unless it was collected within 60 days after year end. 5) Deferred inflows of resources in year of collection: will be recognized as revenue next year when the amount becomes available. 6) Current revenue: the receivable will be reduced, revenue will be recognized, and deferred inflows of resources will be reduced. Difficulty: 3 Hard Topic: Illustrative Journal Entries Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

87) The following is a pre-closing trial balance for Sun City's General Fund as of June 30, 2020:

Cash Taxes Receivable—Current Allowance for Uncollectible Current Taxes Accounts Payable Due to Other Funds Tax Anticipation Notes Payable Fund Balance—Unassigned Budgetary Fund Balance Estimated Revenues Revenues Appropriations Expenditures Totals

Debits $ 116,500 29,000

Credits

3,000 7,800 5,500 50,000 70,200 1,000

100,000 102,000 99,000 93,000 $ 338,500

$ 338,500

What is the fund balance as of June 30, 2020, after all closing entries have been made? Answer: The fund balance as of June 30, 2020 is $79,200. This amount is calculated by starting with the beginning fund balance of $70,200 and adding the positive $9,000 difference between revenues of $102,000 and expenditures of $93,000. Difficulty: 2 Medium Topic: Closing Entries Learning Objective: 04-02 Prepare General Fund closing journal entries. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

88) Beach City received a gift of corporate stock valued at $1,200,000 on the date of the gift. The donor specified that the principal amount of the gift be maintained in perpetuity, but that earnings can be used to acquire works of art to improve the appearance of public buildings. All changes in fair value are to increase or decrease the principal amount of the gift. Assuming that Beach City uses a permanent fund to account for the endowment and a special revenue fund to account for the earmarked earnings from the endowment, explain the accounting process for (1) receipt of the original gift, (2) receipt of quarterly dividends, (3) notification that fair value of the original stock increased by $3,000 during the year, and (4) the effect on fund balances of closing temporary accounts at year-end. (Note: Ignore the effects of the transactions at the government-wide level). Answer: (1) The receipt of the original gift is recorded as a contribution in a permanent fund. The debit would be to an investment account. There is no effect in the special revenue fund. (2) Quarterly dividends are recorded as revenue in the permanent fund and transferred out to the special revenue fund to be used to acquire works of art for public buildings. A transfer in is recognized in the special revenue fund. (3) An increase in the fair value of the stock would result in an adjustment of the investment account and a revenue in the permanent fund. 4) Upon the posting of closing entries, the fund balance of the permanent fund would be increase by the amount of the original contribution and the increase in value of the investment. The dividend income would be offset by the transfer out of the dividend to the special revenue fund. The fund balance of the special revenue fund would be increased when the transfer of the dividend is closed to fund balance, but it would be decreased by any expenditures for artwork. Difficulty: 3 Hard Topic: Permanent Funds Learning Objective: 04-06 Account for transactions of a permanent fund. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

89) During fiscal year 2020, the Town of Tonawanda issued purchase orders to various vendors in the amounts shown for the following functions of the town: General Government Public Safety Public Works Culture and Recreation Health and Welfare Miscellaneous Total

82,500 148,700 130,400 97,300 94,800 14,200 $ 567,900

All goods ordered during the year were received at the following actual costs: General Government Public Safety Public Works Culture and Recreation Health and Welfare Miscellaneous Total

83,720 147,940 131,140 98,780 93,970 14,300 $ 569,850

a. Prepare a summary journal entry in the General Fund general journal to record the issuance of purchase orders during fiscal year 2020. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) b. Prepare summary journal entries in the General Fund general journal to record the receipt of and payment for goods during fiscal year 2020. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

Answer:

TOWN OF TONAWANDA General Ledger Debits

a. General Fund: ENCUMBRANCES—2020 ENCUMBRANCES OUTSTANDING—2020 b. General Fund: ENCUMBRANCES OUTSTANDING—2020 ENCUMBRANCES—2020

Credits

567,900 567,900

EXPENDITURES—2020 569,850 VOUCHERS PAYABLE 569,850 Explanation: No further explanation details are available for this problem. Difficulty: 2 Medium Topic: Encumbrances and Purchasing Transactions Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

90) The following transactions occurred for the City of Fontaine's General Fund. 1. The budget prepared for the fiscal year included Total estimated revenues of $2,774,000 and appropriations of $2,693,000. 2. Encumbrances issued against the appropriations during the year were $931,000. 3. The current year's tax levy of $2,005,000 was recorded; uncollectibles were estimated as $65,000. 4. Collections of delinquent taxes from prior years' levies totaled $132,000; collections of the current year's levy totaled $1,459,000. 5. Invoices were received and approved for payment for items ordered in documents recorded as encumbrances in Transaction (2) of this problem. The estimated liability was $851,200. Actual costs were $850,500. 6. Revenue other than taxes collected during the year consisted of licenses and permits, $373,000; intergovernmental revenue, $400,000; and $66,000 of miscellaneous revenues. 7. Payments on Vouchers Payable totaled $1,505,000. Prepare the journal entry. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

Answer: CITY OF FONTAINE—JOURNAL ENTRIES GENERAL LEDGER

Explanation: No further explanation details are available for this problem. Difficulty: 2 Medium Topic: Illustrative Journal Entries Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

91) During the current year, the Town of Salo Alto recorded the following transactions related to its property taxes: 1. Levied property taxes of $3,300,000, of which 2 percent is estimated to be uncollectible. 2. Collected current property taxes amounting to $2,987,500. 3. Collected $26,500 in delinquent taxes and $2,400 in interest and penalties on the delinquent taxes. These amounts had been recorded as Deferred Inflows of Resources in the prior year. 4. Imposed penalties and interest in the amount of $3,750 but only expects to collect $3,100 of that amount. None is expected to be collected this year or within 30 days of year-end. 5. Reclassified uncollected taxes as delinquent. These amounts are not expected to be collected within the first 60 days of the following fiscal year. Prepare the journal entry. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

Answer:

TOWN OF SALO ALTO—JOURNAL ENTRIES GENERAL LEDGER

(The deferred inflow is equal to property tax revenue recognized that has not been collected [3,234,000-2,987,500].) Explanation: No further explanation details are available for this problem. Difficulty: 2 Medium Topic: Accounting for Property Taxes Learning Objective: 04-01 Analyze typical operating transactions for governmental activities and prepare appropriate journal entries at both the government-wide and fund levels. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

Accounting for Governmental and Nonprofit Entities, 18e (Reck) Chapter 5 Accounting for General Capital Assets and Capital Projects 1) General capital assets should be distinguished from capital assets that are specifically associated with activities financed by proprietary and fiduciary funds, since capital assets acquired by proprietary and fiduciary funds are accounted for by those funds. Answer: TRUE Difficulty: 1 Easy Topic: Introduction to General Capital Assets Learning Objective: 05-01 Describe the nature and characteristics of general capital assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 2) GASB standards require that all governmental expenditures for long-lived assets be accounted for by a capital projects fund. Answer: FALSE Difficulty: 1 Easy Topic: Capital Projects Funds Learning Objective: 05-03 Explain the purpose and features of a capital projects fund. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 3) General capital assets purchased or constructed with governmental fund resources are recorded in the governmental activities general ledger at the government-wide level. Answer: TRUE Difficulty: 1 Easy Topic: Accounting for General Capital Assets Learning Objective: 05-01 Describe the nature and characteristics of general capital assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 4) The disposal of a general capital asset, resulting in no revenue or expenditure to the government, is recorded only in the governmental activities accounts. Answer: TRUE Difficulty: 1 Easy Topic: Accounting for General Capital Assets Learning Objective: 05-01 Describe the nature and characteristics of general capital assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 1

5) Historical cost includes acquisition cost less any ancillary costs necessary to put the asset into use. Answer: FALSE Difficulty: 1 Easy Topic: Accounting for General Capital Assets Learning Objective: 05-01 Describe the nature and characteristics of general capital assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 6) Depreciation of general capital assets for the period should be reported in the statement of activities at the government-wide level. Answer: TRUE Difficulty: 1 Easy Topic: Accounting for General Capital Assets Learning Objective: 05-01 Describe the nature and characteristics of general capital assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 7) GASB allows governments with a population below 100,000 to choose the modified approach, whereby they are not required to record depreciation on general capital assets. Answer: FALSE Difficulty: 1 Easy Topic: Classification of General Capital Assets Learning Objective: 05-01 Describe the nature and characteristics of general capital assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 8) Acquisition of a general capital asset represents an expenditure in a governmental fund, but requires capitalization of an asset at the government-wide level. Answer: TRUE Difficulty: 1 Easy Topic: Accounting for General Capital Assets Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

9) While the GASB encourages capitalization of all collections or individual works of art or historical treasures, governments can opt not to capitalize if certain conditions exist. Answer: TRUE Difficulty: 1 Easy Topic: Required Disclosures about Capital Assets Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 10) General capital assets acquired under lease agreements should not be recorded in the governmental activities accounts. Answer: FALSE Difficulty: 1 Easy Topic: General Capital Assets Acquired Under Lease Agreements Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 11) One of the required general capital asset disclosures is a schedule of the additions to, and deductions from, general capital assets during the course of a fiscal year. Answer: TRUE Difficulty: 1 Easy Topic: Required Disclosures about Capital Assets Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 12) General capital assets acquired with capital projects fund resources would be recorded in essentially the same manner as if they had been acquired by the General Fund. Answer: TRUE Difficulty: 1 Easy Topic: Capital Projects Funds Learning Objective: 05-03 Explain the purpose and features of a capital projects fund. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 3

13) Capital projects funds should use the accrual basis of accounting. Answer: FALSE Difficulty: 1 Easy Topic: Capital Projects Funds Learning Objective: 05-03 Explain the purpose and features of a capital projects fund. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 14) Capital projects funds generally do not use the Encumbrances control account. Answer: FALSE Difficulty: 1 Easy Topic: Capital Projects Funds Learning Objective: 05-03 Explain the purpose and features of a capital projects fund. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 15) In the capital projects fund general journal, Construction Work in Progress is the account used to capitalize the accumulated cost of partially-completed general capital assets. Answer: FALSE Difficulty: 1 Easy Topic: Capital Projects Funds Learning Objective: 05-03 Explain the purpose and features of a capital projects fund. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 16) Intangible assets are defined by the GASB as capital assets that lack physical substance, have a useful life of more than one reporting period, and are nonfinancial in nature. Answer: TRUE Difficulty: 1 Easy Topic: Intangible Assets Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

17) Proceeds of debt issued for the construction or acquisition of capital assets are recognized by the capital projects fund as "other financing sources" and as a liability in the governmental activities journal. Answer: TRUE Difficulty: 1 Easy Topic: Capital Projects Funds Learning Objective: 05-03 Explain the purpose and features of a capital projects fund. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 18) It is common practice for a portion of contractor payments to be withheld in the capital projects fund until final inspection and acceptance of the asset under construction has occurred. Answer: TRUE Difficulty: 1 Easy Topic: Capital Projects Funds Learning Objective: 05-03 Explain the purpose and features of a capital projects fund. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 19) The recorded premium on tax-supported bonds issued by a capital projects fund should be amortized at both the government-wide and fund levels. Answer: FALSE Difficulty: 1 Easy Topic: Capital Projects Funds Learning Objective: 05-03 Explain the purpose and features of a capital projects fund. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 20) Interest incurred during construction of general capital assets cannot be capitalized as part of the cost of those assets. Answer: TRUE Difficulty: 1 Easy Topic: Capital Projects Funds Learning Objective: 05-03 Explain the purpose and features of a capital projects fund. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

21) State laws often require that assets no longer needed in a capital projects fund be transferred to the fund that will service the debt incurred for the project, a debt service fund. Answer: TRUE Difficulty: 1 Easy Topic: Capital Projects Funds Learning Objective: 05-05 Prepare financial statements for a capital projects fund. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 22) Streets, curbs, and sidewalks constructed or acquired through use of capital projects fund resources should never be reported in the financial statements of a government because they are for the use of the public, not for use by the government. Answer: FALSE Difficulty: 1 Easy Topic: Accounting for General Capital Assets Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 23) When a government experiences delays associated with a bond issuance, it is common practice to obtain temporary financing by use of bond anticipation notes. Answer: TRUE Difficulty: 1 Easy Topic: Bond Anticipation Notes Payable Learning Objective: 05-05 Prepare financial statements for a capital projects fund. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 24) The acquisition of long-lived assets under a lease agreement does not require any asset recognition in the accounts of any governmental fund. Answer: TRUE Difficulty: 1 Easy Topic: General Capital Assets Acquired Under Lease Agreements Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 6

25) Water rights purchased by a city would be considered an intangible asset. Answer: TRUE Difficulty: 1 Easy Topic: Intangible Assets Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 26) Capital projects funds differ from the General Fund and special revenue funds in that the latter categories have a year-to-year life, whereas capital projects funds have a project-life focus. Answer: TRUE Difficulty: 1 Easy Topic: Capital Projects Funds; Multiple-Period and Multiple-Project Funds Learning Objective: 05-05 Prepare financial statements for a capital projects fund. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 27) If general capital assets are donated, revenue related to the donation is recognized in the governmental fund statement of revenue, expenditures and changes in fund balance. Answer: FALSE Difficulty: 1 Easy Topic: Accounting for General Capital Assets Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 28) General capital assets financed wholly or partially through collections of special assessments are recorded in the same manner as any other general capital assets in the governmental activities category at the government-wide level. Answer: TRUE Difficulty: 1 Easy Topic: Capital Projects Financed by Special Assessments Learning Objective: 05-05 Prepare financial statements for a capital projects fund. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

29) If all asset, liability, and fund equity accounts of a capital projects fund were closed during a certain fiscal year, it is unnecessary to prepare any financial statements for that fund for that year. Answer: FALSE Difficulty: 2 Medium Topic: Illustrative Financial Statements for a Capital Projects Fund Learning Objective: 05-05 Prepare financial statements for a capital projects fund. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 30) Under a service concession arrangement, a government transfers the rights and obligations of an asset to another legally separate government or private sector entity. Answer: TRUE Difficulty: 2 Medium Topic: Service Concession Arrangement Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 31) Which of the following would be considered a general capital asset? A) A vehicle purchased from General Fund revenues. B) A vehicle purchased and maintained by an enterprise fund. C) A computer purchased from revenues of an internal service fund and used by the supplies department. D) Real estate purchased with the assets of a pension trust fund. Answer: A Difficulty: 1 Easy Topic: Introduction to General Capital Assets Learning Objective: 05-01 Describe the nature and characteristics of general capital assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

32) Capital assets used by governmental funds should be reported in: A) The appropriate governmental funds. B) The property, plant, and equipment fund. C) Departmental memorandum records. D) The governmental activities column of the government-wide statements. Answer: D Difficulty: 1 Easy Topic: Introduction to General Capital Assets Learning Objective: 05-01 Describe the nature and characteristics of general capital assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 33) GASB standards require that general capital assets be recorded in the fund statements at: A) Historical cost. B) Fair value at the financial statement date. C) Estimated cost at the financial statement date. D) None of the options are correct. Answer: D Difficulty: 2 Medium Topic: Accounting for General Capital Assets Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 34) GASB standards require that general capital assets be recorded in the government-wide statements at: A) Historical cost. B) Fair value at the financial statement date. C) Estimated cost at the financial statement date. D) None of the options are correct. Answer: A Difficulty: 2 Medium Topic: Accounting for General Capital Assets Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

35) The following items were included in Castle City's General Fund expenditures for the year ended June. Personal computer for the city treasurer Furniture for the mayor's office

$ $

6,000 20,000

How much should be classified as capital assets in Castle City's General Fund balance sheet at June 30? A) $0. B) $6,000. C) $20,000. D) $26,000. Answer: A Difficulty: 2 Medium Topic: Accounting for General Capital Assets Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 36) The following items were included in Castle City's General Fund expenditures for the year ended June Personal computer for the city treasurer Furniture for the mayor's office

$ $

6,000 20,000

How much should be classified as capital assets in Castle City's government-wide statement of net position at June 30? A) $0. B) $6,000. C) $20,000. D) $26,000. Answer: D Difficulty: 2 Medium Topic: Accounting for General Capital Assets Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

37) During the year, a wealthy local merchant donated a building to the City of Rosewood. The original cost of the building was $300,000. Accumulated depreciation at the date of the gift amounted to $250,000. The appraised value of the donation at the date of the gift was $600,000. At what amount should this contribution be recorded in the governmental activities accounts at the government-wide level? A) $50,000. B) $300,000. C) $600,000. D) $0. Answer: C Difficulty: 1 Easy Topic: Classification of General Capital Assets Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 38) During the year, a wealthy local merchant donated a building to the city of Rosewood. The original cost of the building was $300,000. Accumulated depreciation at the date of the gift amounted to $250,000. The appraised value of the donation at the date of the gift was $600,000. At what amount should Rosewood record this donated property in the General Fund? A) $50,000. B) $300,000. C) $600,000. D) $0. Answer: D Difficulty: 1 Easy Topic: Classification of General Capital Assets Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

39) Which of the following is not a required disclosure about each major class of capital assets? A) Beginning-of-year and end-of-year balances showing accumulated depreciation separate from historical cost. B) Capital acquisitions and sales or other dispositions during the year showing the date and method of acquisition or disposition. C) Depreciation expense for the current period with disclosure of the amounts charged to each function in the statement of activities. D) Disclosures describing works of art or historical treasures that are not capitalized and explaining why they are not capitalized. Answer: B Difficulty: 1 Easy Topic: Required Disclosures about Capital Assets Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 40) The City of Oak Park constructed a new storage facility using the city's own public works employees. Construction costs were incurred in the amount of $900,000, plus $25,000 in interest on short-term notes used to finance construction. What amount should be capitalized in the government-wide statements? A) $900,000. B) $925,000. C) $875,000. D) $0. Answer: A Difficulty: 2 Medium Topic: Accounting for General Capital Assets Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

41) The following general capital assets were owned by the Town of Otterville: Town buildings Intangible assets Streets, sidewalks, and water lines

$ 3,250,000 1,000,000 2,000,000

What amount should be recorded as capital assets in the town's governmental activities accounts? A) $0. B) $3,250,000. C) $5,250,000 D) $6,250,000 Answer: D Difficulty: 2 Medium Topic: Accounting for General Capital Assets Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 42) Equipment that had been acquired several years ago by a special revenue fund at a cost of $40,000 was sold for $15,000 cash. Accumulated depreciation of $30,000 existed at the time of the sale. The journal entry to be made in the governmental activities journal will include all of the following except: A) A debit to Cash for $15,000. B) A debit to Accumulated Depreciation for $30,000. C) A credit to Equipment for $40,000. D) A credit to Other Financing Sources for $5,000. Answer: D Difficulty: 2 Medium Topic: Capital Projects Funds Learning Objective: 05-04 Prepare journal entries for a typical capital project, both at the fund level and within the governmental activities category at the government-wide level. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

43) Equipment that had been acquired several years ago by a special revenue fund at a cost of $40,000 was sold for $15,000 cash. Accumulated depreciation of $30,000 existed at the time of the sale. The journal entry to be made in the special revenue fund will include: A) A debit to Cash for $15,000. B) A debit to Accumulated Depreciation for $30,000. C) A credit to Equipment for $40,000. D) A credit to Other Financing Sources for $5,000. Answer: A Difficulty: 2 Medium Topic: Capital Projects Funds Learning Objective: 05-04 Prepare journal entries for a typical capital project, both at the fund level and within the governmental activities category at the government-wide level. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 44) How should a lease for a general capital asset be recorded in the governmental activities accounts at the inception of the lease? A) Debit to a lease asset account. B) Debit to a capital expense/expenditure account. C) Credit to Lease Obligations Payable. D) Both Debit to a lease asset account and Credit to Lease Obligations Payable are correct. Answer: D Difficulty: 2 Medium Topic: General Capital Assets Acquired Under Lease Agreements Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

45) How should a lease for a general capital asset be recorded in the General Fund accounts at the inception of the lease? A) Debit to a lease asset account. B) Debit to a capital expenditure account. C) Credit to Lease Obligations Payable. D) Both Debit to a lease asset account and Credit to Lease Obligations Payable are correct. Answer: B Difficulty: 2 Medium Topic: General Capital Assets Acquired Under Lease Agreements Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 46) The City of Castle Rock issued bonds at par for the construction of a new city office building. Receipt of the bond proceeds would result in journal entries in which funds? A) Capital Projects Fund: Yes; Debt Service Fund: No B) Capital Projects Fund: No; Debt Service Fund: Yes C) Capital Projects Fund: Yes; Debt Service Fund: Yes D) Capital Projects Fund: No; Debt Service Fund: No Answer: A Difficulty: 2 Medium Topic: Capital Projects Funds Learning Objective: 05-04 Prepare journal entries for a typical capital project, both at the fund level and within the governmental activities category at the government-wide level. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

47) A government enters into a lease agreement for the purchase of a new snow plow. The present value of the future lease payments is $845,500 and there is a down payment at the inception of the lease of $25,000. The snow plow should be recorded in the General Fund at: A) $25,000. B) $870,500. C) $845,500. D) $0. Answer: D Difficulty: 2 Medium Topic: General Capital Assets Acquired Under Lease Agreements Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 48) A government enters into a lease agreement for the purchase of a new snow plow. The present value of the future lease payments is $845,500 and there is a down payment at the inception of the lease of $25,000. The snow plow should be recorded in the government-wide statement of net position at: A) $25,000. B) $870,500. C) $845,500. D) $0. Answer: B Difficulty: 2 Medium Topic: General Capital Assets Acquired Under Lease Agreements Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

49) Which of the following statements is correct regarding depreciation? A) Depreciation expense should be recorded in the appropriate governmental funds, and recorded in the governmental activities accounts. B) Depreciation expense must be recorded in the governmental fund, but no depreciation expense is recorded in the governmental activities accounts. C) No depreciation can be recorded in any governmental fund, but depreciation expense must be recorded in the governmental activities accounts. D) No depreciation can be recorded in any governmental fund, nor is it permissible to record depreciation expense in the governmental activities accounts. Answer: C Difficulty: 2 Medium Topic: Accounting for General Capital Assets Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

50) Four new computers, for which the cost exceeded the city's capitalization threshold, were purchased for use in the city clerk's office using General Fund resources. Which of the following entries would be required to completely record this transaction? A) General Journal Debit Credit General Fund: Expenditures 8,000 Vouchers Payable 8,000 B) General Journal Debit Credit Governmental Activities: Expenses 8,000 Vouchers Payable 8,000 C) General Journal Debit Credit General Fund: Expenditures 8,000 Vouchers Payable 8,000 Governmental Activities: Expenses Vouchers Payable D) General Journal General Fund: Expenditures Vouchers Payable

8,000 8,000 Debit

Credit

8,000 8,000

Governmental Activities: Equipment Vouchers Payable

8,000 8,000

Answer: D Difficulty: 2 Medium Topic: Capital Projects Funds Learning Objective: 05-04 Prepare journal entries for a typical capital project, both at the fund level and within the governmental activities category at the government-wide level. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

51) A capital projects fund might be used to account for which of the following activities? A) Maintaining sidewalks. B) Building a parking garage. C) Providing water and sewer services. D) Servicing long-term debt. Answer: B Difficulty: 2 Medium Topic: Capital Projects Funds Learning Objective: 05-03 Explain the purpose and features of a capital projects fund. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 52) Which of the following is true regarding capital projects funds? A) Encumbrances accounting is employed. B) Encumbrances accounting is not normally employed, but Appropriations are recorded. C) No budgetary accounts are used. D) All budgetary accounts are employed and budget to actual statements are prepared. Answer: A Difficulty: 1 Easy Topic: Capital Projects Funds Learning Objective: 05-04 Prepare journal entries for a typical capital project, both at the fund level and within the governmental activities category at the government-wide level. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 53) In 2020, Sunrise City signed a contract in the amount of $8,000,000 for the construction of a new city hall. Expenditures were $4,000,000 in 2020 and $2,050,000 in 2021, which included a change to the original construction design in the amount of $50,000. What amount should be added to capital assets in the governmental activities accounts in 2021? A) $0 B) $50,000 C) $2,050,000 D) $2,000,000 Answer: C Difficulty: 2 Medium Topic: Accounting for General Capital Assets Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 19

54) To offset engineering and design costs incurred prior to the issuance of a long-term bond issue, a capital projects fund borrowed the sum of $75,000 on a short-term basis from First National Bank. This transaction should be recorded in: A) The capital projects fund. B) The debt service fund. C) The special revenue fund. D) None of the options are correct. Debt is not recorded in governmental funds. Answer: A Difficulty: 2 Medium Topic: Capital Projects Funds Learning Objective: 05-04 Prepare journal entries for a typical capital project, both at the fund level and within the governmental activities category at the government-wide level. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 55) Transfers from the General Fund to the capital projects fund to provide partial financing of a capital project would be reported by the capital projects fund as a(an): A) Fund balance addition. B) Revenue. C) Other financing source. D) Current liability. Answer: C Difficulty: 1 Easy Topic: Capital Projects Funds Learning Objective: 05-04 Prepare journal entries for a typical capital project, both at the fund level and within the governmental activities category at the government-wide level. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

56) Which of the following statements is correct concerning interest expenditures incurred during the period of construction of capital projects? A) Interest expenditures may not be capitalized as part of the cost of general capital assets reported in governmental activities. B) Interest expenditures may be capitalized as part of the cost of general capital assets reported in the governmental activities accounts at the government-wide level. C) Interest expenditures must be capitalized as part of the cost of general capital assets reported in the capital projects fund. D) The capitalization of interest expenditures as part of the cost of general capital assets reported in the capital projects fund is optional. Answer: A Difficulty: 2 Medium Topic: Capital Projects Funds Learning Objective: 05-04 Prepare journal entries for a typical capital project, both at the fund level and within the governmental activities category at the government-wide level. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 57) When part of a progress payment for construction is withheld until final settlement of the contract, what account is credited? A) Encumbrances. B) Appropriations. C) Contracts Payable—Retained Percentage. D) Construction Expenditures. Answer: C Difficulty: 1 Easy Topic: Retained Percentages Learning Objective: 05-05 Prepare financial statements for a capital projects fund. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

58) The following balances are included in the subsidiary records of Carrollwood: Town hall building Town pool (supported by user fees) Police cars Equipment Office supplies

$ 500,000 100,000 20,000 7,500 1,000

What is the total amount of general capital assets held by the town? A) $527,500. B) $528,500. C) $627,500. D) $628,500. Answer: A Difficulty: 2 Medium Topic: Introduction to General Capital Assets Learning Objective: 05-01 Describe the nature and characteristics of general capital assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 59) Which of the following activities or transactions would normally not be accounted for in a capital projects fund? A) Construction of a new city jail. B) Construction of airport runways financed by revenue bonds and to be repaid from the revenues of the city airport, an enterprise fund. C) Lease of a building to be used as a city office building. D) Construction of a new city park to be maintained primarily from General Fund revenues. Answer: B Difficulty: 2 Medium Topic: Capital Projects Funds Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

60) A city recorded an asset impairment to a public works facility. Which of the following is correct concerning the recording of the amount of the asset impairment? A) The General Fund would record a debit to Expenditures. B) The General Fund would record a debit to Other Financing Uses—Loss due to Impairment. C) The governmental activities accounts would record a debit to Loss due to Impairment. D) The governmental activities accounts would record a debit to Expenses—Public Works. Answer: D Difficulty: 2 Medium Topic: Asset impairments and Insurance Recoveries Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 61) A government experienced significant loss of certain roadways and bridges as a result of major flooding. Which of the following estimation approaches would be most useful in estimating the amount of asset impairment that has occurred? A) Deflated depreciated replacement cost approach. B) Service units approach. C) Restorative cost approach. D) Each of these three approaches would be equally useful. Answer: C Difficulty: 2 Medium Topic: Asset impairments and Insurance Recoveries Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 62) Premiums received on tax-supported bonds are generally transferred to what fund? A) Internal service fund. B) Debt service. C) General. D) Special revenue. Answer: B Difficulty: 1 Easy Topic: Bond Premium, Discount, and Accrued Interest on Bonds Sold Learning Objective: 05-05 Prepare financial statements for a capital projects fund. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 23

63) Governments can opt not to capitalize collections or individual works of art or historical treasures if the collection is: A) Held for public exhibition, education, or research in furtherance of public service rather than for financial gain. B) Protected, kept unencumbered, cared for, and preserved. C) Subject to an organizational policy that requires the proceeds from sales of collection items to be used to acquire other items for collections. D) All of the options are correct. Answer: D Difficulty: 2 Medium Topic: Required Disclosures about Capital Assets Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 64) Which of the following is not true for capital projects funds? A) Capital projects funds use a Construction Work in Progress account to record costs until the project is completed. B) Encumbrance accounting is generally used. C) Capital projects funds use the modified accrual basis of accounting. D) Capital projects funds have a project-life focus. Answer: A Difficulty: 2 Medium Topic: Capital Projects Funds Learning Objective: 05-03 Explain the purpose and features of a capital projects fund. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

65) In late April, the Acme Construction Co. submitted a $1,200,000 progress billing on a construction contract. On May 2, the bill was approved for payment, subject to a ten percent retention, as provided by the contract. Construction expenditures should be debited when: A) The bill is approved for payment. B) The contract is signed. C) The bill is paid (except for the ten percent retention). D) The final ten percent of the bill is paid. Answer: A Difficulty: 2 Medium Topic: Capital Projects Funds Learning Objective: 05-04 Prepare journal entries for a typical capital project, both at the fund level and within the governmental activities category at the government-wide level. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 66) In late April, the Acme Construction Co. submitted a $1,200,000 progress billing on a construction contract. On May 2, the bill was approved for payment, subject to a ten percent retention, as provided by the contract. The amount that should be debited to Construction Expenditures is: A) $0. B) $12,000. C) $1,080,000. D) $1,200,000. Answer: D Difficulty: 2 Medium Topic: Capital Projects Funds Learning Objective: 05-04 Prepare journal entries for a typical capital project, both at the fund level and within the governmental activities category at the government-wide level. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

67) At the inception of a lease for equipment the journal entry required in the capital projects fund will include which of the following? A) A debit to Equipment. B) A debit to Lease Expense. C) A credit to Obligations under Leases. D) A credit to Other Financing Sources—Lease Agreement. Answer: D Difficulty: 2 Medium Topic: General Capital Assets Acquired Under Lease Agreements Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 68) Which of the following is not a requirement that must be met to elect the "modified approach" to reporting certain eligible infrastructure assets? A) The government gets the permission of the Government Accounting Standards Board. B) The government documents that the eligible infrastructure assets are being preserved approximately at (or above) the condition level established and disclosed. C) The government manages the assets using an asset management system that includes condition assessments of the assets and summary of results using a measurement scale. D) The government manages the assets using an asset management system that includes estimates each year of the annual amount needed to maintain and preserve the eligible assets at the condition level established and disclosed by the government. Answer: A Difficulty: 2 Medium Topic: Infrastructure Assets Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

69) When a snowplow is purchased by a government, it should be recorded in the governmental activities general journal as a(an): A) Expenditure. B) Capital asset. C) Appropriation. D) Expense. Answer: B Difficulty: 2 Medium Topic: Capital Projects Funds Learning Objective: 05-04 Prepare journal entries for a typical capital project, both at the fund level and within the governmental activities category at the government-wide level. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 70) A general capital asset constructed several years ago by a capital projects fund was sold by the General Fund. Entries are necessary in the: A) General Fund only. B) General Fund and the capital projects fund. C) General Fund and governmental activities. D) Governmental activities only. Answer: C Difficulty: 2 Medium Topic: Capital Projects Funds Learning Objective: 05-04 Prepare journal entries for a typical capital project, both at the fund level and within the governmental activities category at the government-wide level. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 71) In which of the following would it not be appropriate to record depreciation of capital assets? A) Capital projects fund. B) Internal service fund. C) Business-type activities. D) Governmental activities. Answer: A Difficulty: 1 Easy Topic: Capital Projects Funds Learning Objective: 05-04 Prepare journal entries for a typical capital project, both at the fund level and within the governmental activities category at the government-wide level. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 27

72) The Town of Golden purchased a squad car for the police department. If the operations of the police department are financed by general revenues, which of the following is correct concerning where the capital asset would be recorded? A) General Fund: No; Governmental Activities: Yes B) General Fund: No; Governmental Activities: No C) General Fund: Yes; Governmental Activities: No D) General Fund: Yes; Governmental Activities: Yes Answer: A Difficulty: 2 Medium Topic: Accounting for General Capital Assets Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 73) Which of the following statements regarding capital assets is not true? A) Proprietary funds routinely account for capital assets used in their operations within the fund financial statements. B) Fiduciary funds do not account for property, plant, and equipment within the fund financial statements. C) Because governmental funds account only for current financial resources, these funds do not record capital assets acquired by the funds. D) General capital assets purchased or constructed with governmental fund resources are recorded in the governmental activities general ledger at the government-wide level. Answer: B Difficulty: 2 Medium Topic: Accounting for General Capital Assets Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

74) When a government transfers the rights and obligations of an asset to another legally separate governmental or private sector entity, the transaction is referred to as: A) A special assessment arrangement. B) An infrastructure agreement. C) A service concession arrangement. D) A sale-leaseback agreement. Answer: C Difficulty: 1 Easy Topic: Service Concession Arrangement Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 75) Under a service concession arrangement: A) The transferring government continues to report the transferred asset as a capital asset and any related contractual obligations as liabilities. B) The operating government will record the transferring government's payment or receivable, a liability for the present value of significant contractual obligations and a corresponding deferred inflow of resources for the difference between the two. C) Any deferred inflow of resources is recognized as revenue at the time the arrangement takes place. D) All of the given statements are true. Answer: A Difficulty: 2 Medium Topic: Service Concession Arrangement Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

76) For each of the following definitions, select the key term from the list that relate to general capital assets and capital projects. A. Bond anticipation notes B. Infrastructure assets C. Service Concession Arrangements D. General capital assets E. Capital projects funds F. Asset impairment G. Intangible assets H. Depreciation 1. Assets that lack physical substance and are nonfinancial in nature 2. Short-term interest-bearing instruments issued by a government with a plan to replace with longer-term debt 3. Roads, bridges, curbs and gutters, streets, sidewalks, and drainage systems installed for the common good 4. Capital assets of a government that are not recorded in a proprietary or fiduciary fund 5. Significant, unexpected decline in the service utility of a capital asset Answer: 1. G, 2. A, 3. B, 4. D, 5. F Explanation: No further explanation details are available for this problem. Difficulty: 1 Easy Topic: General Capital Assets Learning Objective: 05-01 Describe the nature and characteristics of general capital assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

77) If a city's General Fund acquires a new copier under a lease agreement: 1) The cost of the copier should be recorded in the general journal(s). 2) The "cost" of the copier is computed as . 3) A governmental fund should record the cost of the copier as an Expenditure, offset by a credit to . 4) The liability for the lease should be recorded in the general journal(s). 5) The liability should be computed as . Answer: 1) General Fund and governmental activities. 2) The present value of rentals and other minimum lease payments, or the fair value of the leased property, whichever is less. 3) Other financing sources—lease agreements. 4) Governmental activities. 5) The present value of rentals and other minimum lease payments. Difficulty: 2 Medium Topic: General Capital Assets Acquired Under Lease Agreements Learning Objective: 05-01 Describe the nature and characteristics of general capital assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 78) What is the difference between using the modified approach to accounting for infrastructure assets and depreciating infrastructure assets? Answer: The modified approach to accounting for infrastructure assets does not record an adjusting entry recognizing depreciation expense and accumulated depreciation. Rather the government reports, as an expense, the costs of maintaining the infrastructure assets at an established level or condition. By doing this the book value of the infrastructure asset remains unchanged (i.e., there is no accumulated depreciation). This is unlike the depreciation method, whereby the book value of the infrastructure assets decreases each time depreciation expense is recorded. Difficulty: 2 Medium Topic: Accounting for General Capital Assets; Infrastructure Assets Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

79) Under the modified approach, what happens if infrastructure assets are not maintained at or above the established condition level? Answer: If the government fails to maintain the assets at or above the established condition level, it must revert to reporting depreciation for its infrastructure assets and discontinue use of the modified approach. Difficulty: 2 Medium Topic: Accounting for General Capital Assets; Infrastructure Assets Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 80) If bonds are sold at a premium to finance a capital project, what important question arises concerning the premium? Discuss the proper accounting for a bond premium in the capital projects fund, the debt service fund, and the government-wide statements assuming that the premium must be reserved for debt service. Answer: If bonds sold to finance the construction of general capital assets are sold at a premium, the question arises as to whether or not the initial issue premium is required to be set aside for debt service or may remain in the capital projects fund. If bond indentures require that initial issue premiums be used for debt service, only the par value of the bonds is considered as an other financing source of the capital projects fund, and the premium is considered as an other financing source of the debt service fund. At the government-wide level, a premium would be recorded and should be amortized over the life of the bonds. Difficulty: 2 Medium Topic: Bond Premium, Discount, and Accrued Interest on Bonds Sold Learning Objective: 05-05 Prepare financial statements for a capital projects fund. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

81) Which expenditures of a capital projects fund should be capitalized to Construction Work in Progress? Is Construction Work in Progress included in the chart of accounts of a capital projects fund? If not, where would it be found? Answer: All ordinary and necessary costs to construct or acquire the asset are appropriately reported as construction work in progress. This includes all legal costs, engineering and architectural services, site preparation, materials used, and billings from contractors, among other items. Interest incurred during construction is not capitalized for general capital assets, however. Construction Work in Progress is found in the ledger for governmental activities at the government-wide level for general capital assets. This capital asset account is not found in the ledger of the capital projects fund. In the capital projects fund, all capitalizable items are debited to Construction Expenditures. Difficulty: 2 Medium Topic: Accounting for General Capital Assets; Classification of General Capital Assets Learning Objective: 05-02 Account for general capital assets, including acquisition, maintenance, depreciation, impairment, and disposition. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

82) The City of McNeely sold bonds in the amount of $25,000,000 to finance the construction of a public health center. The bonds are serial bonds and were sold at par on January 1, the first day of a fiscal year. Shortly thereafter a construction contract in the amount of $22,000,000 was signed and the contractor commenced work. By year-end the contractor had been paid in full for all billings to date amounting to $12,000,000. Prepare, in general journal form, all journal entries that should have been made during the fiscal year ended December 31 to record the preceding information in the capital projects fund. (No closing entry is required). Answer:

CAPITAL PROJECTS FUND

CASH OTHER FINANCING SOURCES– PROCEEDS OF BONDS

Debits 25,000,000

25,000,000

ENCUMBRANCES ENCUMBRANCES OUTSTANDING

22,000,000

ENCUMBRANCES OUTSTANDING ENCUMBRANCES

12,000,000

CONSTRUCTION EXPENDITURES CONTRACTS PAYABLE

12,000,000

OTHER FINANCING SOURCES– PROCEEDS OF BONDS FUND BALANCE–RESTRICTED CONSTRUCTION EXPENDITURES

Credits

22,000,000

12,000,000

25,000,000 13,000,000 12,000,000

Explanation: No further explanation details are available for this problem. Difficulty: 3 Hard Topic: Capital Projects Funds Learning Objective: 05-04 Prepare journal entries for a typical capital project, both at the fund level and within the governmental activities category at the government-wide level. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

83) Prepare journal entries for the following related transactions in the fund and activity journals affected: (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) 1. A capital projects fund issued $5,000,000, 4 percent bonds for $5,050,000 to finance improvements of a park. Premiums received are to be used to service the debt issue. 2. The Parks and Recreation Special Revenue Fund transferred $250,000 for use in construction. 3. A construction contract was awarded in the amount of $5,200,000. 4. A bill was received from the contractor for $2,600,000. 5. The contractor's bill is paid, and 5% retainage is withheld. 6. The park renovations were completed and the final bill of $2,600,000 was received. The contractor's bill and retainages are approved for payment in full. Total construction expenditures were allocated as follows: $5,000,000 to building, and the remainder to equipment. 7. The capital projects fund temporary accounts were closed, and the capital projects fund was closed by transferring remaining funds to the debt service fund for use in debt repayment. Answer: 1. Debits Capital Projects Fund: CASH OTHER FINANCING SOURCES– PROCEEDS OF BONDS

Credits

5,000,000 5,000,000

Governmental Activities: CASH BONDS PAYABLE PREMIUM ON BONDS PAYABLE

5,050,000 5,000,000 50,000

Debt Service Fund: CASH OTHER FINANCING SOURCES– BOND PREMIUM

50,000 50,000

(Note: This assumes the premium and interest are recorded directly in the debt service fund. If the premium and interest were first recorded in the capital projects fund, the capital projects fund would also credit Due to Debt Service Fund for $50,000.)

2. Capital Projects Fund: CASH OTHER FINANCING SOURCES– INTERFUND TRANSFERS IN

250,000 250,000

Special Revenue Fund: OTHER FINANCING USES– INTERFUND TRANSFERS IN CASH

250,000 250,000

3. Capital Projects Fund: ENCUMBRANCES ENCUMBRANCES OUTSTANDING

5,200,000 5,200,000

4. Capital Projects Fund: CONSTRUCTION EXPENDITURES CONTRACTS PAYABLE

2,600,000 2,600,000

ENCUMBRANCES OUTSTANDING ENCUMBRANCES

2,600,000 2,600,000

Governmental Activities: CONSTRUCTION WORK IN PROGRESS CONTRACTS PAYABLE

2,600,000

5. Capital Projects Fund and Governmental Activities: CONTRACTS PAYABLE CONTRACTS PAYABLE–RETAINED PERCENTAGE CASH

2,600,000

130,000 2,470,000

6. Capital Projects Fund: CONSTRUCTION EXPENDITURES CONTRACTS PAYABLE

2,600,000 2,600,000

ENCUMBRANCES OUTSTANDING ENCUMBRANCES

2,600,000

CONTRACTS PAYABLE CONTRACTS PAYABLE–RETAINED PERCENTAGE CASH

2,600,000

130,000 2,730,000

Governmental Activities: CONSTRUCTION WORK IN PROGRESS CONTRACTS PAYABLE

2,600,000 2,600,000

CONTRACTS PAYABLE CONTRACTS PAYABLE–RETAINED PERCENTAGE CASH

2,600,000

PARK BUILDING EQUIPMENT CONSTRUCTION WORK IN PROGRESS

5,000,000 200,000

130,000 2,730,000

5,200,000

7. Capital Projects Fund: To close nominal accounts: OTHER FINANCING SOURCES– PROCEEDS OF BONDS OTHER FINANCING SOURCES– INTERFUND TRANSFERS IN CONSTRUCTION EXPENDITURES FUND BALANCE–RESTRICTED OR ASSIGNED

5,000,000 250,000 5,200,000 50,000

To close the fund: OTHER FINANCING USES– INTERFUND TRANSFERS OUT CASH

50,000 50,000

FUND BALANCE–RESTRICTED OR ASSIGNED OTHER FINANCING USES– INTERFUND TRANSFERS OUT

50,000 50,000

Debt Service Fund: CASH OTHER FINANCING SOURCES– INTERFUND TRANSFERS IN

50,000 50,000

Difficulty: 3 Hard Topic: Capital Projects Funds Learning Objective: 05-04 Prepare journal entries for a typical capital project, both at the fund level and within the governmental activities category at the government-wide level. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

Accounting for Governmental and Nonprofit Entities, 18e (Reck) Chapter 6 Accounting for General Long-Term Liabilities and Debt Service 1) The use of long-term debt is a traditional part of the fiscal policy of state and local governments. Answer: TRUE Difficulty: 1 Easy Topic: Introduction to General Long-Term Liabilities Learning Objective: 06-01 Explain what types of liabilities are classified as general long-term liabilities. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 2) Although some governments have issued taxable debt, the interest earned on most debt issued by state and local governments is exempt from federal taxation and, in some states, from state taxation. Answer: TRUE Difficulty: 1 Easy Topic: Introduction to General Long-Term Liabilities Learning Objective: 06-01 Explain what types of liabilities are classified as general long-term liabilities. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 3) General long-term liabilities are those that arise from activities of governmental funds as well as those reported as fund liabilities of a proprietary or fiduciary fund. Answer: FALSE Difficulty: 1 Easy Topic: General Long-Term Liabilities Learning Objective: 06-01 Explain what types of liabilities are classified as general long-term liabilities. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

4) All special assessment debt should be reported in the government-wide statement of net position in the Business-type Activities column. Answer: FALSE Difficulty: 1 Easy Topic: Accounting for Long-Term Liabilities Learning Objective: 06-02 Prepare note disclosures for general long-term debt, including schedules of statutory debt limits, debt margin, and overlapping debt. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 5) When a lease payment is made, an entry is made in the debt service (or appropriate governmental) fund to record an expenditure, and an entry is made in the governmental activities accounts to reduce Lease Obligations Payable. Answer: TRUE Difficulty: 1 Easy Topic: Use of Debt Service Funds to Record Lease Payments Learning Objective: 06-02 Prepare note disclosures for general long-term debt, including schedules of statutory debt limits, debt margin, and overlapping debt. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 6) The use of encumbrance accounting is required for debt service funds. Answer: FALSE Difficulty: 1 Easy Topic: Budgeting for Debt Service Learning Objective: 06-03 Explain the purpose and nature of debt service funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 7) Debt limit is a term used to denote the total amount of indebtedness of specified kinds that is allowed by law to be outstanding at any one time. Answer: TRUE Difficulty: 1 Easy Topic: Debt Limit and Debt Margin Learning Objective: 06-02 Prepare note disclosures for general long-term debt, including schedules of statutory debt limits, debt margin, and overlapping debt. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 2

8) Debt margin is the difference between the debt limit and the amount of outstanding debt subject to the debt limitation. Answer: TRUE Difficulty: 1 Easy Topic: Debt Limit and Debt Margin Learning Objective: 06-02 Prepare note disclosures for general long-term debt, including schedules of statutory debt limits, debt margin, and overlapping debt. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 9) Debt margin is a term used to denote the total amount of indebtedness of specified kinds that is allowed by law to be outstanding at any one time, while debt limit is the difference between the debt margin and the amount of outstanding debt subject to the debt limitation. Answer: FALSE Difficulty: 1 Easy Topic: Debt Limit and Debt Margin Learning Objective: 06-02 Prepare note disclosures for general long-term debt, including schedules of statutory debt limits, debt margin, and overlapping debt. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 10) Since the debt of a government is subject to a legal debt limit, there cannot be any legal overlapping debt. Answer: FALSE Difficulty: 1 Easy Topic: Long-Term Liability Disclosures Learning Objective: 06-02 Prepare note disclosures for general long-term debt, including schedules of statutory debt limits, debt margin, and overlapping debt. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

11) Financial statement note disclosures on long-term liabilities should include information on authorization of new debt issues, sale of previously authorized issues, and retirement and refunding of debt during the year. Answer: TRUE Difficulty: 1 Easy Topic: Long-Term Liability Disclosures Learning Objective: 06-02 Prepare note disclosures for general long-term debt, including schedules of statutory debt limits, debt margin, and overlapping debt. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 12) Notes to the financial statements of a state or local government should include a schedule, or summary, of debt service requirements (principal and interest payments) of debt outstanding on the balance sheet date. Answer: TRUE Difficulty: 1 Easy Topic: Long-Term Liability Disclosures Learning Objective: 06-02 Prepare note disclosures for general long-term debt, including schedules of statutory debt limits, debt margin, and overlapping debt. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 13) Resources to pay interest on tax-supported bond issues are generally accumulated in special revenue funds. Answer: FALSE Difficulty: 1 Easy Topic: Accounting for Bonds Learning Objective: 06-03 Explain the purpose and nature of debt service funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 14) Long-term debt intended to be repaid from tax levies or special assessments is recorded in debt service funds. Answer: FALSE Difficulty: 1 Easy Topic: Debt Service Funds Learning Objective: 06-03 Explain the purpose and nature of debt service funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 4

15) The debt service activity of a government may be accounted for within the General Fund unless law mandates the use of a debt service fund. Answer: TRUE Difficulty: 1 Easy Topic: Debt Service Funds Learning Objective: 06-03 Explain the purpose and nature of debt service funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 16) A given parcel of real estate may be subject at a given time to assessments for the payment of taxes to retire bonds issued by two or more governments. Answer: TRUE Difficulty: 1 Easy Topic: Overlapping Debt Learning Objective: 06-02 Prepare note disclosures for general long-term debt, including schedules of statutory debt limits, debt margin, and overlapping debt. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 17) Governmental fund liabilities and expenditures for debt service on general long-term debt are generally recognized in the reporting period that debt payments are due. Answer: TRUE Difficulty: 1 Easy Topic: Debt Service Funds Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

18) If a government has deposited or transferred financial resources dedicated for payment of debt service to the debt service fund and payment of principal and interest is due early in the following year, then the expenditure and related liability may be recognized in the debt service fund prior to year end. Answer: TRUE Difficulty: 2 Medium Topic: Debt Service Funds Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 19) Debt service fund activities are reported as part of governmental activities at the government-wide level. Answer: TRUE Difficulty: 1 Easy Topic: General Long-Term Liabilities Learning Objective: 06-01 Explain what types of liabilities are classified as general long-term liabilities. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 20) Debt service funds for term bonds would generally include sinking fund investments. Answer: TRUE Difficulty: 1 Easy Topic: Types of Bonds Learning Objective: 06-04 Identify characteristics of serial bonds and term bonds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 21) Term bond issues mature in installments. Answer: FALSE Difficulty: 1 Easy Topic: Types of Bonds Learning Objective: 06-04 Identify characteristics of serial bonds and term bonds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

22) Under a bond refunding, the proceeds of a new bond issuance are either deposited in escrow to pay the debt service on the outstanding bonds when due or used to promptly retire previously issued bonds. Answer: TRUE Difficulty: 1 Easy Topic: Accounting for Debt Refunding Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 23) The issuance of general long-term bonds is reported in the fund receiving the proceeds and in the business-type activities column of the government-wide statements. Answer: FALSE Difficulty: 1 Easy Topic: Debt Service Funds Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 24) Special assessment debt that carries government backing should be reported as "special assessment debt with governmental commitment." Answer: TRUE Difficulty: 1 Easy Topic: Debt Service Accounting for Special Assessment Debt Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 25) The purpose of a sinking fund is to set aside resources for a substantial debt payment due at maturity. Answer: TRUE Difficulty: 1 Easy Topic: Types of Bonds Learning Objective: 06-04 Identify characteristics of serial bonds and term bonds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 7

26) Compensated absences, pollution remediation obligations, and claims and judgments are examples of long-term liabilities that can arise from operating activities. Answer: TRUE Difficulty: 1 Easy Topic: Other Long-Term Liabilities Learning Objective: 06-01 Explain what types of liabilities are classified as general long-term liabilities. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 27) Compensated absences are leaves of absence for which employees earn the right to be paid, but likely will not be paid due to insufficient government funds. Answer: FALSE Difficulty: 1 Easy Topic: Other Long-Term Liabilities Learning Objective: 06-01 Explain what types of liabilities are classified as general long-term liabilities. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 28) Pollution remediation obligations arise from responsibilities related to the cleanup of hazardous wastes or hazardous substances resulting from existing pollution. Answer: TRUE Difficulty: 1 Easy Topic: Other Long-Term Liabilities Learning Objective: 06-01 Explain what types of liabilities are classified as general long-term liabilities. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

29) Governments should report an estimated loss from a claim or judgment as an expense and as a liability in the government-wide financial statements if a claim appears reasonable. Answer: FALSE Difficulty: 1 Easy Topic: Other Long-Term Liabilities Learning Objective: 06-01 Explain what types of liabilities are classified as general long-term liabilities. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 30) Compensated absences may be reported in governmental funds. Answer: TRUE Difficulty: 1 Easy Topic: Other Long-Term Liabilities Learning Objective: 06-01 Explain what types of liabilities are classified as general long-term liabilities. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 31) Which of the following is not properly recorded in the governmental activities accounts? A) Tax-supported general obligation bonds. B) Obligations under leases used to finance general capital assets. C) The long-term portion of judgments and claims. D) Revenue bonds issued by an enterprise fund. Answer: D Difficulty: 1 Easy Topic: Accounting for Bonds Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

32) Which of the following statements regarding debt service funds is true? A) Given the size and relevance of general long-term liabilities, debt service funds are always reported as major funds. B) GASB standards require a separate debt service fund to be established for each issuance of tax-supported or special assessment debt. C) A debt service fund is used only for debt service activities related to general long-term liabilities. D) By law debt service funds are required to use encumbrance accounting. Answer: C Difficulty: 1 Easy Topic: Debt Service Funds Learning Objective: 06-03 Explain the purpose and nature of debt service funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 33) The liability for special assessment bonds that carry a secondary pledge of a city's general credit should be reported in the balance sheet(s) of: A) A debt service fund. B) A custodial fund. C) The governmental activities accounts. D) A custodial fund and disclosed in the notes to the financial statements. Answer: C Difficulty: 2 Medium Topic: Debt Service Accounting for Special Assessment Debt Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

34) Which of the following statements is true? A) Debt margin is reported in the governmental activities column of the government-wide statements. B) Debt limit represents the total amount of indebtedness of specified kinds that is allowed by law to be outstanding at any one time. C) Overlapping debt is a calculation of the difference between the amount of debt limit calculated as prescribed by law and the net amount of outstanding indebtedness subject to limitation. D) All of the given statements are true. Answer: B Difficulty: 2 Medium Topic: Long-Term Liability Disclosures Learning Objective: 06-02 Prepare note disclosures for general long-term debt, including schedules of statutory debt limits, debt margin, and overlapping debt. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 35) When Sunny City makes its annual lease payment on an unpaid lease obligation, the journal entry for the governmental activities accounts will include: A) A debit to Lease Obligation Payable. B) A credit to Lease Obligation Payable. C) A debit to Lease Expense. D) A debit to Expenditures—Principal of Lease Obligation. Answer: A Difficulty: 2 Medium Topic: Use of Debt Service Funds to Record Lease Payments Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

36) When Sunny City makes its annual lease payment on an unpaid lease obligation, the journal entry for the debt service fund accounts will include: A) A debit to Lease Obligation Payable. B) A credit to Lease Obligation Payable. C) A debit to Lease Expense. D) A debit to Expenditures—Principal of Lease Obligation. Answer: D Difficulty: 2 Medium Topic: Use of Debt Service Funds to Record Lease Payments Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 37) Pollution remediation obligations should be recognized if which of the following obligating events has occurred? A) A violation of a pollution prevention permit has occurred. B) The government is named or will be named as the responsible or potentially responsible party to a remediation. C) The government is compelled to take remediation action due to imminent endangerment to the public health. D) All of the given items are obligating events that would require recognition of a pollution remediation obligation. Answer: D Difficulty: 2 Medium Topic: Other Long-Term Liabilities Learning Objective: 06-01 Explain what types of liabilities are classified as general long-term liabilities. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

38) A debt service fund is a: A) Nonexpendable fund. B) Governmental fund. C) Fiduciary fund. D) Proprietary fund. Answer: B Difficulty: 1 Easy Topic: Debt Service Funds Learning Objective: 06-03 Explain the purpose and nature of debt service funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 39) On the due date for a bond interest and principal payment, the debt service fund journal entry (or entries) will include: A) A debit to Bonds Payable. B) A debit to Interfund Transfers Out. C) A debit to Expenditures—Bond Interest. D) A debit to Interest Expense. Answer: C Difficulty: 1 Easy Topic: Accounting for Debt Service Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

40) Which of the following statements is always true concerning the reporting of debt service funds? A) Debt service funds are reported in a separate column in the governmental fund financial statements. B) Debt service funds are reported in a separate column in the government-wide financial statements. C) Debt service funds are reported in the Other Governmental Funds column in the governmental fund financial statements. D) Debt service funds are reported in the Governmental Activities column in the government-wide financial statements. Answer: D Difficulty: 1 Easy Topic: Financial Reporting Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 41) Which of the following debt service fund accounts would not be closed at the end of each fiscal year? A) Estimated Revenues. B) Fund Balance. C) Revenues. D) Expenditures—Bond Interest. Answer: B Difficulty: 1 Easy Topic: Accounting for Bonds Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

42) The Town of Windsor issued the following during the year: (1) $600,000 in bonds for the installation of street lights, to be assessed against properties benefited, but secondarily backed by the town; (2) $800,000 in bonds for construction of a public golf course to be self-supported from fees collected from golf course users. How much should be accounted for through debt service funds for payments of principal over the life of the bonds? A) $0. B) $600,000. C) $800,000. D) $1,400,000. Answer: B Difficulty: 2 Medium Topic: Debt Service Accounting for Special Assessment Debt Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 43) Special assessments levied for debt service of bonds issued for a special assessment capital project will be accounted for by a debt service fund under which of the following situations?

A B C D A) A. B) B. C) C. D) D.

Government is secondarily obligated Government is not secondarily obligated for the debt for the debt Yes Yes Yes No No Yes No No

Answer: B Difficulty: 2 Medium Topic: Debt Service Accounting for Special Assessment Debt Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

44) The liability for general obligation bonds should be recorded in the: A) General Fund. B) Capital projects fund. C) Governmental activities journal. D) Debt service fund. Answer: C Difficulty: 2 Medium Topic: Accounting for Bonds Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 45) On the due date for bond interest, the debt service fund journal entry (or entries) will include a debit to: A) Expenditures—Bond Interest. B) Interfund Transfers In. C) Appropriations. D) Interest Expense. Answer: A Difficulty: 2 Medium Topic: Accounting for Bonds Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 46) When bonds are sold at a premium for a capital project, the premium amount generally: A) Increases the cash available to the capital projects fund. B) Is transferred to the debt service fund. C) Is applied against the principal balance by the fiduciary agent. D) Is recorded in a fiduciary fund since it does not belong to the capital projects fund. Answer: B Difficulty: 2 Medium Topic: Accounting for Bonds Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

47) The City of New Haven issued $20 million of tax-supported bonds at 102 to finance a new jail. Upon issuance, how will the premium be recorded? A) A $400,000 revenue to the capital projects fund and a $400,000 revenue in governmental activities. B) A $400,000 revenue to the debt service fund and a $400,000 premium on bonds payable in governmental activities. C) A $400,000 expenditure in the debt service fund and a $400,000 expense in governmental activities. D) A $400,000 other financing source to the debt service fund and a $400,000 premium on bonds payable in governmental activities. Answer: D Difficulty: 2 Medium Topic: Accounting for Bonds Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 48) Typically, proceeds from general obligation bonds will be recorded in the: A) Debt service fund. B) General obligation bond fund. C) Permanent fund. D) Capital projects fund. Answer: D Difficulty: 1 Easy Topic: Accounting for Bonds Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

49) Which of the following statements is not true for debt service funds? A) Special assessment debt for which the government has some obligation is paid through the debt service fund. B) Interest payable may be reported as a liability of the debt service fund. C) Bond principal is shown as a liability of the debt service fund only when that principal is due and payable. D) All tax-supported bond principal is shown as a liability of the debt service fund. Answer: D Difficulty: 2 Medium Topic: Accounting for Bonds Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 50) Debt service funds are used to account for which of the following? A) Payment of only interest on general long-term debt. B) Payment of only principal on general long-term debt. C) Payment of principal and interest on general long-term debt. D) Payment of principal and interest on all debt of the government. Answer: C Difficulty: 1 Easy Topic: Debt Service Funds Learning Objective: 06-03 Explain the purpose and nature of debt service funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 51) Which of the following assets would not be found in the balance sheet of a debt service fund? A) Cash with fiscal agent. B) Investments. C) Equipment. D) Interest Receivable. Answer: C Difficulty: 1 Easy Topic: Financial Reporting Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

52) The City of Spartan's fiscal year ends on December 31. On October 1, 2020, the city issued $1,000,000 of 6%, 10-year term bonds with semiannual interest payments due on April 1 and October 1 each year, beginning on April 1, 2021. What amount of expenditures should the city recognize in its debt service fund for the years 2020 and 2021? A) $60,000 in 2020; $60,000 in 2021. B) $30,000 in 2020; $60,000 in 2021. C) $15,000 in 2020; $6,000 in 2021. D) $0 in 2020; $60,000 in 2021. Answer: D Difficulty: 2 Medium Topic: Accounting for Bonds Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 53) The City of Spartan's fiscal year ends on December 31. On October 1, 2020, the city issued $1,000,000 of 6%, 10-year term bonds with semiannual interest payments due on April 1 and October 1 each year, beginning on April 1, 2021. What amount of expense should the city recognize in its governmental activities journal for the years 2020 and 2021? A) $60,000 in 2020; $60,000 in 2021. B) $30,000 in 2020; $60,000 in 2021. C) $15,000 in 2020; $60,000 in 2021. D) $0 in 2020; $60,000 in 2021. Answer: C Difficulty: 2 Medium Topic: Accounting for Bonds Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

54) Which of the following debt service funds would normally have the largest balance in its Fund Balance account? A) Serial bond debt service fund. B) Deferred serial bond debt service fund. C) Irregular serial bond debt service fund. D) Term bond debt service fund. Answer: D Difficulty: 2 Medium Topic: Types of Bonds Learning Objective: 06-04 Identify characteristics of serial bonds and term bonds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 55) If a city has an unpaid lease obligation at the beginning of its fiscal year, the journal entry in the debt service fund to record the lease payment during that fiscal year will include: A) A debit to Lease Obligations Payable. B) A credit to Expenditures—Principal of Lease Obligation. C) A debit to Expenditures—Principal of Lease Obligation. D) A debit to Interest Expense on Leases. Answer: C Difficulty: 2 Medium Topic: Use of Debt Service Funds to Record Lease Payments Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

56) On June 1, Brooktown levied special assessments in the amount of $500,000, payable in 10 equal annual installments beginning on June 30. The assessment installments are intended to pay principal and interest on special assessment bonds for which the town has pledged its full faith and credit should assessments be insufficient. Assuming no allowance for uncollectible receivables, the journal entry in the debt service fund on June 1 would include: A) A debit to Assessments Receivable—Current for $500,000. B) A debit to Assessments Receivable—Current for $50,000. C) A credit to Revenues for $500,000. D) No journal entry is made in the debt service fund because special assessments are used. Answer: B Difficulty: 3 Hard Topic: Debt Service Accounting for Special Assessment Debt Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 57) Which of the following is a true statement regarding in-substance defeasance of bonds? A) The government must place cash or other assets in an irrevocable trust sufficient to pay all future interest and principal payments for the debt being defeased. B) The government must agree to maintain sufficient cash and investment balances in its debt service fund to cover all interest and principal payments for the debt being defeased. C) The government must pledge to transfer amounts to an escrow agent prior to the due date for each interest and principal payment for the debt being defeased. D) The government must agree to maintain sufficient unrestricted cash and investments in its governmental funds to cover all interest and principal payments for the debt being defeased. Answer: A Difficulty: 2 Medium Topic: Accounting for Debt Refunding Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

58) When the debt service fund makes a payment of principal and interest on an outstanding long-term debt, the governmental activities accounts: A) Reflect the principal payment only. B) Reflect the interest payment only. C) Have no record of the transaction. D) Reflect both principal and interest payments. Answer: D Difficulty: 1 Easy Topic: Accounting for Bonds Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 59) Which of the following basic financial statements contains a column for the total of all debt service funds? A) Statement of cash flows. B) Statement of revenues, expenditures, and changes in governmental fund balances. C) Statement of revenues, expenses, and changes in proprietary net position. D) No basic financial statement contains a column for the total of all debt service funds. Answer: D Difficulty: 2 Medium Topic: Financial Reporting Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 60) Which of the following financial statements are required for a Debt Service Fund? A) Statement of net position only. B) Statement of revenues, expenditures, and changes in fund balances only. C) Balance sheet and statement of revenues, expenditures, and changes in fund balance only. D) Balance sheet; statement of revenues, expenditures, and changes in fund balance; and statement of cash flows. Answer: C Difficulty: 1 Easy Topic: Financial Reporting Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 22

61) The sale of revenue bonds by a water utility fund would be recorded: A) In the governmental activities column as a liability. B) In an enterprise fund as Proceeds of Bonds. C) In an enterprise fund as a liability. D) In an enterprise fund as a revenue. Answer: C Difficulty: 2 Medium Topic: General Long-Term Liabilities Learning Objective: 06-01 Explain what types of liabilities are classified as general long-term liabilities. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 62) The General Fund of the City of Castle Rock transfers $115,000 to the debt service fund for a $100,000 principal and $15,000 interest payment. The recording of this transaction would include: A) A debit to Interest Expenditures in the General Fund. B) A debit to Interest Expenditures in the governmental activities accounts. C) A credit to Other Financing Sources — Interfund Transfers In in the debt service fund only. D) A credit to Other Financing Sources — Interfund Transfers In in both the debt service fund and governmental activities accounts. Answer: C Difficulty: 2 Medium Topic: Debt Service Funds Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

63) The General Fund of the City of Castle Rock transfers $115,000 to the debt service fund for a $100,000 bond principal and $15,000 interest payment. Subsequent payment of the principal and interest would include: A) A debit to Expenditures — Bond Interest in the debt service fund. B) A debit to Other Financing Uses — Principal and Interest Payments in the debt service fund. C) A debit to Expenditures – Bond Interest in the General Fund. D) A debit to Interest Expenditures in the governmental activities accounts. Answer: A Difficulty: 2 Medium Topic: Accounting for Bonds Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 64) On March 2, 2019, 20-year, 6 percent, general obligation serial bonds were issued at the face amount of $3,000,000. Interest of 6 percent per annum is due semiannually on March 1 and September 1. The first payment of $150,000 for redemption of principal is due on March 1, 2020. Fiscal year-end occurs on December 31. What is the interest expense for the fiscal year ending December 31, 2019? A) $90,000. B) $135,000. C) $150,000. D) None of the options are correct. Answer: C Difficulty: 2 Medium Topic: Accounting for Bonds Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

65) On March 2, 2019, 20-year, 6 percent, general obligation serial bonds were issued at the face amount of $3,000,000. Interest of 6 percent per annum is due semiannually on March 1 and September 1. The first payment of $150,000 for redemption of principal is due on March 1, 2020. Fiscal year-end occurs on December 31. What is the interest expenditure for the fiscal year ending December 31, 2019? A) $90,000. B) $135,000. C) $150,000. D) None of the options are correct. Answer: A Difficulty: 2 Medium Topic: Accounting for Bonds Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

66) Select the key term that relate to accounting for general long-term liabilities and debt service from the list that best matches with the following definition. A. Legal defeasance B. Regular serial bonds C. In-substance defeasance D. Irregular serial bonds E. Debt limit F. Annuity serial bonds G. Debt margin 1. A transaction in which cash or other assets are placed into an irrevocable trust for the benefit of debt holders 2. Bonds for which the amount of annual principal repayments is scheduled to increase each year by approximately the same amount that interest payments decrease 3. Bonds payable in which the total principal is repayable in a specified number of equal annual installments 4. The maximum amount of gross or net debt that is legally permitted 5. A transaction in which debt is legally satisfied based on certain provisions in the debt instrument even though the debt has not been repaid Answer: 1. C, 2. F, 3. B, 4. E, 5. A Explanation: No further explanation details are available for this problem. Difficulty: 1 Easy Topic: Debt Limit and Debt Margin; Accounting for Debt Refunding Learning Objective: 06-02 Prepare note disclosures for general long-term debt, including schedules of statutory debt limits, debt margin, and overlapping debt.; 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

67) The debt limit for general obligation debt for Milos City is 1 percent of the assessed property valuation for the city. Assessed property valuation Approved but unissued tax-supported debt Revenue bonds issued General obligation serial bonds issued Leases outstanding

$ 10,863,511,000 10,000,000 32,000,000 43,000,000 5,230,000

Calculate the city's debt limit and debt margin. Answer: Debt limit ($10,863,511,000 × 0.01 = $108,635,110) Less: General obligation serial bonds - (43,000,000) Debt margin = $65,635,110 (Note: Self-supporting debt, such as revenue bonds, is generally not subject to debt limits. For revenue bonds to be included they would need to be secondarily backed by the full taxing power of the city. Also, leases are generally not considered a part of general obligation debt, unless there is a law or ordinance to the contrary. In some jurisdictions it may be necessary to include authorized but unissued debt in the calculation. At a minimum, the $10,000,000 should be disclosed.) Difficulty: 3 Hard Topic: Long-Term Liability Disclosures Learning Objective: 06-02 Prepare note disclosures for general long-term debt, including schedules of statutory debt limits, debt margin, and overlapping debt. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

68) In the current fiscal year, St. George County issued $3,000,000 in general obligation term bonds for 102. The county is required to use any accrued interest or premiums for servicing the debt issue. a. How would the bond issue be recorded at the fund and government-wide levels? b. How would the bond issue be reported in the fund financial statements and the government-wide financial statements? c. What effect, if any, do interest payments have on the carrying value of the bond issue as reported in the financial statements? Answer: a. The fund receiving the benefit of the bond issue, such as a capital projects fund, would record a debit to Cash and a credit to Other Financing Sources—Proceeds of Bonds. Since premiums and accrued interest must be used to service the debt, the premium on the bond sale would be recorded in the debt service fund as a debit to Cash and a credit to Other Financing Sources—Premium on Bonds. (The premium could also be recorded in the capital projects fund and remitted to the debt service fund.) At the government-wide level the debit would be to Cash for the total amount (bond payable plus premium) with related credits to Bonds Payable and Premium on Bonds Payable. b. At the fund level the cash would be reported on the balance sheet and the accounts, Other Financing Sources—Proceeds of Bonds and Other Financing Sources—Premium on Bonds, would be reported on the statement of revenues, expenditures and changes in fund balances. At the government-wide level in the Governmental Activities column cash would be reported on the statement of net position as would the bond payable. The account Bonds Payable would be classified as a long-term liability (except for the current portion, which is due within one year) and the Premium on Bonds Payable would increase (add to) the carrying value of the Bonds Payable. c. GASB requires that the effective interest method be used to amortize the Premium on Bonds Payable. As a result, the amortization of the premium reduces the carrying value of the bond by the amount of premium amortized each interest payment period. At the maturity of the bond the carrying value of the bond will be equal to the face value of the bond. Difficulty: 3 Hard Topic: Accounting for Bonds Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Apply

69) A government's MD&A states that government-wide net position decreased as a result of the issuance of a long-term liability during the current reporting period. Does this sound correct? How does the issuance of long-term debt typically affect net position in the year of issuance? Answer: On the surface, this statement does not sound correct. The issuance of long-term debt at par will result in a debit to Cash and a credit to Bonds Payable in the government-wide journal. The issuance of debt would have no effect on net position; however, any payment of interest in the year of issuance would decrease net position. It is possible for this circumstance to occur if the proceeds from the debt were spent on a capital asset (such as road construction) that was then gifted to another government. Thus the government issuing the debt used the resources for construction in the current year (debiting CWIP and crediting cash); however, the gift removed the capital asset with an offsetting decrease to net position. It was the outright gift of the capital asset, rather than the debt issuance that caused the decrease in net position. Difficulty: 2 Medium Topic: Accounting for General Long-Term Debt Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 70) How are general long-term liabilities distinguished from other long-term liabilities of the government? How does the financial reporting of general long-term liabilities differ from the financial reporting of other long-term liabilities? Answer: General long-term liabilities are those that arise from activities of governmental funds and that are not reported as fund liabilities of a proprietary or fiduciary fund. General long-term liabilities are reported as liabilities in the Governmental Activities column of the government-wide statement of net position but are not reported as liabilities of governmental funds. Difficulty: 2 Medium Topic: General Long-Term Liabilities Learning Objective: 06-01 Explain what types of liabilities are classified as general long-term liabilities. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

71) Explain the essential differences between regular serial bonds, deferred serial bonds, annuity serial bonds, and irregular serial bonds. How do regular serial bonds differ from term bonds? Answer: For a regular serial bond, the total principal is repayable in a specified number of equal annual installments over the life of the issue. If the first installment of a serial bond issue is delayed for a period of more than one year after the bond issue date, but all future installments fall due on a regular basis, the bonds are known as deferred serial bonds. With annuity serial bonds, the amount of annual principal repayments increases each year by approximately the same amount that interest payments decrease so that the total debt service payment remains relatively level over the term of the issue. Irregular serial bonds exhibit payment patterns that do not fit the other three categories. Regular serial bonds typically have principal maturities extending from one year to 20 or more years and do not require setting aside resources. Term bonds, on the other hand, have a one-time principal maturity that requires a lump-sum repayment of principal on the due date. Governments generally set aside resources over time to prepare for the large lump-sum payment. This practice may be required by the debt agreement. Difficulty: 2 Medium Topic: Types of Bonds Learning Objective: 06-04 Identify characteristics of serial bonds and term bonds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 72) "The entire debt arising from the acquisition of general capital assets under a lease agreement should be reported as debt of the fund that accounts for the activities of the department or function using the leased asset. Only debt arising from the lease of equipment used by a number of departments should be reported in the governmental activities accounts, rather than a fund." Do you agree? Why or why not? Answer: Disagree. The present value of minimum lease payments required by a lease agreement for the acquisition of general capital assets should be recorded as general long-term liabilities at the inception of the lease. Lease payments are usually considered as debt service; the debt service fund would record any lease payments when they are due, and the portion of the payment that is a payment on the principal of the obligation would be deducted from the liability recorded in the governmental activities accounts. Difficulty: 2 Medium Topic: Use of Debt Service Funds to Record Lease Payments Learning Objective: 06-02 Prepare note disclosures for general long-term debt, including schedules of statutory debt limits, debt margin, and overlapping debt. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

73) Explain the financial reporting for special assessment bonds when a government assumes responsibility for debt service should special assessment collections be insufficient, and when the government assumes no responsibility whatsoever. Answer: If the government is obligated in some manner to make the debt service payments in the event that amounts collected from benefited property owners are insufficient, the debt should be recorded in the governmental activities journal at the government-wide level and a debt service fund should be used to account for debt service activities. The portion of the special assessment debt that will be repaid from property owner assessments should be reported as "special assessment debt with governmental commitment" to recognize government backing of the debt, while the portion of special assessment debt that will be repaid from general resources of the government (the public benefit portion or the amount assessed against government-owned property) should be reported like other general long-term liabilities. If the government is not obligated in any manner for special assessment debt, the debt should not be displayed in the financial statements of the government. In addition, the notes should disclose the amount of the debt and the fact that the government is in no way liable for repayment but is only acting as a custodian for the property owners in collecting the assessments, forwarding the collections to bondholders, and initiating foreclosure proceedings, if appropriate. Since the government is acting as a custodian, the information will be reported in a fiduciary financial statement (covered in Chapter 8). Difficulty: 2 Medium Topic: Accounting for Long-Term Liabilities Learning Objective: 06-02 Prepare note disclosures for general long-term debt, including schedules of statutory debt limits, debt margin, and overlapping debt. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

74) The City of Jamestown has agreed to acquire a new city maintenance building under a lease agreement. At the inception of the lease, a payment of $100,000 is to be made; nine annual lease payments, each in the amount of $100,000, are to be made at the end of each year after the inception of the lease. The total amount to be paid under this lease, therefore, is $1,000,000. The town could borrow this amount for nine years at the annual rate of 8 percent; therefore, the present value of the lease at inception, including the initial payment, is $724,689. Assume that the fair value of the building at the inception of the lease is $750,000. a. Prepare the entry that should be made in a capital projects fund at the inception of the lease. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) b. Prepare the entry that should be made at the inception of the lease in the governmental activities journal. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) c. Prepare the entry that should be made in the debt service fund and governmental activities journal to record the second lease payment. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) Answer: a.

CITY OF JAMESTOWN Debits

Capital Projects Fund: EXPENDITURES OTHER FINANCING SOURCES– LEASE AGREEMENTS

Credits

724,689 724,689

The present value of an ordinary annuity of $1 for 9 years at 8 percent per year is 6.24689. Therefore, the present value of the 9 annual payments of $100,000 each is $624,689. The present value of the lease obligation is $724,689 ($624,689 + $100,000 paid at the inception of the lease). Note: When the initial payment of $100,000 is made by the debt service fund, it would debit Expenditures— Principal for $100,000 and credit Cash for the same amount. b. Governmental Activities: EQUIPMENT LEASE OBLIGATIONS PAYABLE CASH

724,689 624,689 100,000

Note: The asset is recorded at the lesser of the present value of the lease obligation or the fair value of the building, $750,000.

c. Debt Service Fund: EXPENDITURES–INTEREST EXPENDITURES–PRINCIPAL CASH Governmental Activities: EXPENSES–INTEREST ON LEASES LEASE OBLIGATIONS PAYABLE CASH Payment Number

49,975 50,025 100,000 49,975 50,025 100,000

Amount of Interest on Unpaid Payment Balance at 8%

Payment on Unpaid Lease Principal Obligation $724,689 $ 0 $100,000 624,689 49,975 50,025 574,664

1 $100,000 2 100,000 Difficulty: 3 Hard Topic: Use of Debt Service Funds to Record Lease Payments Learning Objective: 06-02 Prepare note disclosures for general long-term debt, including schedules of statutory debt limits, debt margin, and overlapping debt. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

75) As of December 31, 2019, Westport had $9,500,000 in 4.5 percent serial bonds outstanding. The serial bonds pay interest semiannually on July 1 and December 31, with $500,000 in bonds being retired on each interest payment date. Resources for payment of principal and interest are transferred from the General Fund. Prepare debt service fund and government-wide entries in general journal form to reflect, as necessary, the following information and transactions for FY 2020. (1) The operating budget for FY 2020 consists of other financing sources (transfers from the General Fund) equal to estimated principal and interest payments. Appropriations also must be provided for interest payments and bond redemptions on July 1 and December 31. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) (2) Cash was received from the General Fund and checks were written and mailed for the July 1 principal and interest payments. Answer: (1) Debits Credits Serial Bond Debt Service Fund: ESTIMATED OTHER FINANCING SOURCES 1,416,250 APPROPRIATIONS 1,416,250 Budget For FY 2020: Interest = $9,500,000 × 0.045 × ½ For July 1 payment = $213,750 and $9,000,000 × 0.045 × ½ = $202,500 for December 31 payment, two principal payments = $1,000,000. Governmental Activities: No entries required (2) Serial Bond Debt Service Fund: CASH 713,750 OTHER FINANCING SOURCES– 713,750 INTERFUND TRANSFERS IN EXPENDITURES–BOND INTEREST 213,750 EXPENDITURES–BOND PRINCIPAL 500,000 CASH 713,750 Governmental Activities: INTEREST EXPENSE 213,750 BONDS PAYABLE 500,000 CASH 713,750 Difficulty: 3 Hard Topic: Accounting for Bonds Learning Objective: 06-05 Make journal entries to account for general long-term liabilities in debt service funds and in the governmental activities general journal. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 34

Accounting for Governmental and Nonprofit Entities, 18e (Reck) Chapter 7 Accounting for the Business-type Activities of State and Local Governments 1) For proprietary funds, governments generally present a statement of net position in a format that displays assets, plus deferred outflows of resources, less liabilities, less deferred inflows of resources, equals net position. Answer: TRUE Difficulty: 1 Easy Topic: Financial Reporting Requirements Learning Objective: 07-01 Describe the characteristics and financial reporting requirements of proprietary funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 2) A statement of cash flows is prepared for enterprise funds but not for internal service funds. Answer: FALSE Difficulty: 1 Easy Topic: Financial Reporting Requirements Learning Objective: 07-01 Describe the characteristics and financial reporting requirements of proprietary funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 3) Revenues of internal service funds should be recognized only when they are expected to be available in time to pay current liabilities of the fund. Answer: FALSE Difficulty: 1 Easy Topic: Internal Service Funds Learning Objective: 07-02 Prepare journal entries and financial statements for an internal service fund. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

4) Internal service funds account for operating expenses on the accrual basis of accounting. Answer: TRUE Difficulty: 1 Easy Topic: Internal Service Funds Learning Objective: 07-02 Prepare journal entries and financial statements for an internal service fund. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 5) Internal service funds should not account for depreciation of capital assets used in their operations, since this would, in effect, charge the government twice for the same assets. Answer: FALSE Difficulty: 1 Easy Topic: Internal Service Funds Learning Objective: 07-02 Prepare journal entries and financial statements for an internal service fund. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 6) The net position of an internal service fund is classified as nonspendable, restricted, committed, assigned, and unassigned. Answer: FALSE Difficulty: 1 Easy Topic: Internal Service Funds Learning Objective: 07-02 Prepare journal entries and financial statements for an internal service fund. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 7) Internal service funds are intended to operate on taxes or other financing sources authorized by the legally enacted revenue budget for each year; therefore, they are classified as governmental funds. Answer: FALSE Difficulty: 1 Easy Topic: Internal Service Funds Learning Objective: 07-02 Prepare journal entries and financial statements for an internal service fund. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 2

8) Internal service funds utilize encumbrance accounting. Answer: FALSE Difficulty: 1 Easy Topic: Internal Service Funds Learning Objective: 07-02 Prepare journal entries and financial statements for an internal service fund. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 9) A statement of revenues, expenses, and changes in fund net position for an internal service fund is similar in many respects to an income statement prepared for a commercial business. Answer: TRUE Difficulty: 1 Easy Topic: Financial Reporting Requirements Learning Objective: 07-01 Describe the characteristics and financial reporting requirements of proprietary funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 10) Equipment acquired under a lease for use by an internal service fund will be reported as a capital asset in both the fund and government-wide financial statements. Answer: TRUE Difficulty: 1 Easy Topic: Financial Reporting Requirements Learning Objective: 07-01 Describe the characteristics and financial reporting requirements of proprietary funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 11) A motor pool is a common example of an internal service fund. Answer: TRUE Difficulty: 1 Easy Topic: Proprietary Funds Learning Objective: 07-01 Describe the characteristics and financial reporting requirements of proprietary funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 3

12) An employee pension fund is a common example of an internal service fund. Answer: FALSE Difficulty: 1 Easy Topic: Proprietary Funds Learning Objective: 07-01 Describe the characteristics and financial reporting requirements of proprietary funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 13) Proprietary funds follow the current financial resources measurement focus and use the accrual basis of accounting. Answer: FALSE Difficulty: 1 Easy Topic: Proprietary Funds Learning Objective: 07-01 Describe the characteristics and financial reporting requirements of proprietary funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 14) Public utilities owned and operated by governments are common examples of enterprise funds. Answer: TRUE Difficulty: 1 Easy Topic: Proprietary Funds Learning Objective: 07-01 Describe the characteristics and financial reporting requirements of proprietary funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 15) If a business-type activity is subsidized by a government's General Fund rather than fully covering its costs of providing services with fees or charges, that activity need not be reported in an enterprise fund. Answer: TRUE Difficulty: 1 Easy Topic: Proprietary Funds Learning Objective: 07-01 Describe the characteristics and financial reporting requirements of proprietary funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 4

16) Interest and principal on enterprise fund revenue bonds should be recorded in a debt service fund until paid. Answer: FALSE Difficulty: 1 Easy Topic: Long-term Liabilities Learning Objective: 07-05 Prepare journal entries and financial statements for an enterprise fund. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 17) The liability for utility revenue bonds should be reported in business-type activities on the government-wide statements, as well as in the enterprise fund. Answer: TRUE Difficulty: 1 Easy Topic: Long-term Liabilities Learning Objective: 07-05 Prepare journal entries and financial statements for an enterprise fund. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 18) Proprietary funds report using three net position categories: net investment in capital assets; restricted; and unrestricted. Answer: TRUE Difficulty: 2 Medium Topic: Financial Reporting Requirements Learning Objective: 07-01 Describe the characteristics and financial reporting requirements of proprietary funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 19) Enterprise funds may capitalize interest paid on debt incurred for construction of plant assets. Answer: TRUE Difficulty: 1 Easy Topic: Water Utility Funds Learning Objective: 07-05 Prepare journal entries and financial statements for an enterprise fund. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

20) Premiums or discounts on bonds payable issued by enterprise funds should be accounted for in the same manner as those of a comparable business entity. Answer: TRUE Difficulty: 1 Easy Topic: Long-term Liabilities Learning Objective: 07-05 Prepare journal entries and financial statements for an enterprise fund. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 21) GASB requires the statement of cash flows for proprietary funds to be prepared using the direct method of presentation. Answer: TRUE Difficulty: 1 Easy Topic: Financial Reporting Requirements Learning Objective: 07-01 Describe the characteristics and financial reporting requirements of proprietary funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 22) Unlike the General Fund and other major governmental funds for which a budget is legally adopted, proprietary funds are not required by GASB standards to record budgets in their accounting systems, nor are they required to present a budgetary comparison schedule. Answer: TRUE Difficulty: 1 Easy Topic: Financial Reporting Requirements Learning Objective: 07-01 Describe the characteristics and financial reporting requirements of proprietary funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 23) Enterprise funds are reported as a part of the Governmental Activities column of the government-wide financial statements when they provide services to governmental funds. Answer: FALSE Difficulty: 1 Easy Topic: Financial Reporting Requirements Learning Objective: 07-01 Describe the characteristics and financial reporting requirements of proprietary funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 6

24) GASB standards require that interfund receivables and payables between governmental and business-type activities be presented as internal balances. Answer: TRUE Difficulty: 1 Easy Topic: Internal Service Funds Learning Objective: 07-02 Prepare journal entries and financial statements for an internal service fund. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 25) If enterprise funds are the predominant participants in an internal service fund, the government should report the internal service fund's residual assets, deferred inflows and outflows of resources, and liabilities within the business-type activities column in the statement of net position. Answer: TRUE Difficulty: 1 Easy Topic: Internal Service Funds Learning Objective: 07-02 Prepare journal entries and financial statements for an internal service fund. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 26) Consistent with accounting in capital projects funds, interest capitalization for self-constructed assets of proprietary funds is prohibited. Answer: FALSE Difficulty: 1 Easy Topic: Water Utility Funds Learning Objective: 07-05 Prepare journal entries and financial statements for an enterprise fund. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

27) In the context of regulatory utility plant accounting, original cost and historical cost have the same meaning. Answer: FALSE Difficulty: 1 Easy Topic: Regulatory Accounting Principles Learning Objective: 07-06 Explain special topics in accounting for the business-type activities of state and local governments. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 28) The amount of expense and liability to be reported each period for the closure and postclosure costs of a municipal solid waste landfill (MSWLF) is proportional to the amount of landfill capacity used during the period. Answer: TRUE Difficulty: 1 Easy Topic: Accounting for Municipal Solid Waste Landfills Learning Objective: 07-06 Explain special topics in accounting for the business-type activities of state and local governments. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 29) Under regulatory reporting, Utility Plant in Service is stated at original cost. Answer: TRUE Difficulty: 1 Easy Topic: Regulatory Accounting Principles Learning Objective: 07-06 Explain special topics in accounting for the business-type activities of state and local governments. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 30) All segments within an enterprise fund are subject to segment disclosure requirements. Answer: FALSE Difficulty: 1 Easy Topic: Required Segment Information Learning Objective: 07-06 Explain special topics in accounting for the business-type activities of state and local governments. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 8

31) Which of the following may properly be reported as a component of net position in the proprietary fund statement of net position? A) Retained earnings. B) Designated equity. C) Restricted net position. D) Contributed capital. Answer: C Difficulty: 1 Easy Topic: Financial Reporting Requirements Learning Objective: 07-01 Describe the characteristics and financial reporting requirements of proprietary funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 32) Which of the following properly portrays the components of net position for proprietary funds? A) Net investment in capital assets, Reserved, Unreserved. B) Designated, Undesignated, Restricted, Unrestricted. C) Net investment in capital assets, Restricted, Unrestricted. D) Contributed capital, Net investment in capital assets, Reserved, Unreserved. Answer: C Difficulty: 1 Easy Topic: Financial Reporting Requirements Learning Objective: 07-01 Describe the characteristics and financial reporting requirements of proprietary funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 33) Which of the following funds of a government uses the same basis of accounting as a proprietary fund? A) Permanent fund. B) Investment trust fund. C) Special revenue fund. D) Capital projects fund. Answer: B Difficulty: 2 Medium Topic: Proprietary Funds Learning Objective: 07-01 Describe the characteristics and financial reporting requirements of proprietary funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 9

34) Internal service funds should be used only if: A) The reporting government funds the activity with general obligation debt. B) The reporting government provides services primarily to external participants. C) The reporting government provides services primarily to other departments of the same government. D) The reporting government provides services below full cost. Answer: C Difficulty: 2 Medium Topic: Proprietary Funds Learning Objective: 07-01 Describe the characteristics and financial reporting requirements of proprietary funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 35) In which of the following funds is it appropriate to record depreciation of capital assets? A) Internal service fund. B) Permanent fund. C) General fund. D) Capital projects fund. Answer: A Difficulty: 1 Easy Topic: Internal Service Funds Learning Objective: 07-02 Prepare journal entries and financial statements for an internal service fund. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 36) Which of the following is a difference between enterprise funds and internal service funds? A) The use of cost accounting by enterprise funds but not internal service funds. B) The customers who primarily benefit from the fund's service. C) The number of fund financial statements required. D) The measurement focus on economic resources for enterprise funds and current financial resources for internal service funds. Answer: B Difficulty: 2 Medium Topic: Proprietary Funds Learning Objective: 07-01 Describe the characteristics and financial reporting requirements of proprietary funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 10

37) The comprehensive annual financial report (CAFR) of a government should contain a statement of revenues, expenses, and changes in fund net position for: A) Both proprietary and governmental funds. B) Proprietary but not governmental funds. C) Governmental but not proprietary funds. D) Proprietary and fiduciary funds. Answer: B Difficulty: 2 Medium Topic: Financial Reporting Requirements Learning Objective: 07-01 Describe the characteristics and financial reporting requirements of proprietary funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 38) Which of the following activities or services would most likely not be accounted for by an internal service fund? A) Electronic data processing. B) Central purchasing, warehousing, and issuing of supplies. C) Municipal swimming pool. D) Risk management. Answer: C Difficulty: 2 Medium Topic: Proprietary Funds Learning Objective: 07-01 Describe the characteristics and financial reporting requirements of proprietary funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

39) When a supplies internal service fund records a billing to the General Fund, the journal entry in the internal service fund will include: A) A debit to Due from General Fund. B) A debit to Due to General Fund. C) A debit to Billings to Department. D) A debit to Inventory of Supplies. Answer: A Difficulty: 2 Medium Topic: Internal Service Funds Learning Objective: 07-02 Prepare journal entries and financial statements for an internal service fund. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 40) When a supplies internal service fund records a billing to the General Fund, the journal entry in the General Fund will include: A) A debit to Cost of Supplies Issued. B) A credit to Interfund Loans Payable. C) A debit to Expenditures. D) A credit to Billings to Department. Answer: C Difficulty: 2 Medium Topic: Internal Service Funds Learning Objective: 07-02 Prepare journal entries and financial statements for an internal service fund. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 41) Which of the following is not true regarding proprietary funds? A) The difference between assets plus deferred outflows of resources and liabilities plus deferred inflows of resources of proprietary funds is called "net assets." B) Proprietary funds record long-term debt directly in the fund accounts. C) Proprietary funds record capital assets directly in the fund accounts. D) Proprietary funds present a statement of cash flows. Answer: A Difficulty: 1 Easy Topic: Proprietary Funds Learning Objective: 07-01 Describe the characteristics and financial reporting requirements of proprietary funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 12

42) Under GASB standards, an internal service fund should prepare all of the following financial statements except a: A) Statement of revenues, expenditures, and changes in fund balance. B) Statement of revenues, expenses, and changes in net position. C) Statement of net position. D) Statement of cash flows. Answer: A Difficulty: 2 Medium Topic: Financial Reporting Requirements Learning Objective: 07-01 Describe the characteristics and financial reporting requirements of proprietary funds. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 43) Which of the following illustrates the appropriate basis of accounting for enterprise and internal service funds? Enterprise Funds A. Modified Accrual B. Modified Accrual C. Accrual D. Accrual A) Choice A. B) Choice B. C) Choice C. D) Choice D.

Internal Service Funds Modified Accrual Accrual Modified Accrual Accrual

Answer: D Difficulty: 1 Easy Topic: Proprietary Funds Learning Objective: 07-01 Describe the characteristics and financial reporting requirements of proprietary funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

44) An internal service fund normally uses which of the following budgetary accounts? A) Estimated Revenues. B) Appropriations. C) Encumbrances. D) An internal service fund normally does not use budgetary accounts. Answer: D Difficulty: 2 Medium Topic: Internal Service Funds Learning Objective: 07-02 Prepare journal entries and financial statements for an internal service fund. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 45) Goods and services provided by internal service funds to other departments of the government are typically priced to: A) Cover variable costs only. B) Cover full costs (both fixed and variable). C) Cover full costs, plus an additional charge to capital maintenance and anticipated expansion needs. D) Cover full costs, plus an additional charge to ensure a reasonable profit. Answer: C Difficulty: 2 Medium Topic: Internal Service Funds Learning Objective: 07-02 Prepare journal entries and financial statements for an internal service fund. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

46) Which of the following should be accounted for in an internal service fund? Light poles to be paid for in installments by affected property owners $ 350,000 Van used to transport supplies to all city departments on a cost 65,000 reimbursement basis Equipment used for supplying electric power to residents 1,250,000 A) $ 65,000. B) $ 415,000. C) $1,250,000. D) $1,315,000. Answer: A Difficulty: 2 Medium Topic: Internal Service Funds Learning Objective: 07-02 Prepare journal entries and financial statements for an internal service fund. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 47) Which of the following should be accounted for in an enterprise fund? Light poles to be paid for in installments by affected property owners $ 350,000 Van used to transport supplies to all city departments on a cost 65,000 reimbursement basis Equipment used for supplying electric power to residents 1,250,000 A) $ 65,000. B) $ 415,000. C) $1,250,000. D) $1,315,000. Answer: C Difficulty: 2 Medium Topic: Enterprise Funds Learning Objective: 07-05 Prepare journal entries and financial statements for an enterprise fund. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

48) When a new internal service fund is established with a transfer of funds (not to be repaid), which account would be credited in the internal service fund? A) Cash. B) Interfund Transfer In. C) Interfund Transfer Out. D) Estimated Revenues. Answer: B Difficulty: 2 Medium Topic: Internal Service Funds Learning Objective: 07-02 Prepare journal entries and financial statements for an internal service fund. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 49) The City of Crescent Hill operates a central motor pool as an internal service fund for the benefit of the city's other funds and departments. In the current year, this fund charged the Parks Department $30,000 for vehicle rentals. What account should the internal service fund use to record these charges? A) Interfund Transfers In. B) Interfund Exchanges. C) Billings to Departments. D) Cost of Providing Rentals to Other Funds and Units. Answer: C Difficulty: 2 Medium Topic: Internal Service Funds Learning Objective: 07-02 Prepare journal entries and financial statements for an internal service fund. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

50) The City of Crescent Hill operates a central motor pool as an internal service fund for the benefit of the city's other funds and departments. In the current year, this fund billed the Parks Department $30,000 for vehicle rentals. If the Parks Department is a governmental fund, which account should the Parks Department use to record these billings? A) Interfund Transfers In. B) Interfund Exchanges. C) Expenditures. D) Cost of Rentals from Other Funds and Units. Answer: C Difficulty: 2 Medium Topic: Internal Service Funds Learning Objective: 07-02 Prepare journal entries and financial statements for an internal service fund. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 51) When utility customers are billed during the year, the enterprise fund journal entry will include: A) A debit to Sales of Water. B) A debit to Cash - Restricted. C) A debit to Customer Accounts Receivable. D) A debit to Billings to Customers. Answer: C Difficulty: 2 Medium Topic: Enterprise Funds Learning Objective: 07-05 Prepare journal entries and financial statements for an enterprise fund. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 52) When a new utility customer submits a deposit, the enterprise fund journal entry will include: A) A credit to Customer Deposits. B) A debit to Customer Deposits. C) A debit to Sales of Water. D) A credit to Sales of Water. Answer: A Difficulty: 2 Medium Topic: Enterprise Funds Learning Objective: 07-05 Prepare journal entries and financial statements for an enterprise fund. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 17

53) Customers' meter deposits, which cannot be spent for normal operating purposes, would be classified as restricted cash in the balance sheet of which fund type? A) Internal service fund. B) Private-purpose trust fund. C) Enterprise fund. D) Special revenue fund. Answer: C Difficulty: 1 Easy Topic: Enterprise Funds Learning Objective: 07-05 Prepare journal entries and financial statements for an enterprise fund. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 54) Which of the following organizations or units would least likely be accounted for by an enterprise fund? A) A golf course. B) An airport. C) A computer department. D) A sports stadium. Answer: C Difficulty: 1 Easy Topic: Enterprise Funds Learning Objective: 07-04 Explain how an enterprise fund is distinguished from an internal service fund and when an enterprise fund is required. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 55) Which of the following accounts would appropriately be included on an enterprise fund balance sheet? A) Fund Balance: No; Net Position—Unrestricted: Yes. B) Fund Balance: Yes; Net Position—Unrestricted: No. C) Fund Balance: No; Net Position—Unrestricted: No. D) Fund Balance: Yes; Net Position—Unrestricted: Yes. Answer: A Difficulty: 2 Medium Topic: Enterprise Funds Learning Objective: 07-05 Prepare journal entries and financial statements for an enterprise fund. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

56) The following cash transactions were among those reported by Genesee County's Wastewater Enterprise Fund for the year: Proceeds from sale of revenue bonds for construction Interest income Capital contributed by developers

$ 5,000,000 300,000 1,000,000

In the Wastewater Enterprise Fund's statement of cash flows for the year ended December 31, what amount should be reported as cash flows from capital and related financing activities? A) $5,000,000. B) $5,300,000. C) $6,000,000. D) $6,300,000. Answer: C Difficulty: 2 Medium Topic: Enterprise Funds Learning Objective: 07-05 Prepare journal entries and financial statements for an enterprise fund. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 57) The following cash transactions were among those reported by Genesee County's Wastewater Enterprise Fund for the year: Proceeds from sale of revenue bonds for construction Interest income Capital contributed by developers

$ 5,000,000 300,000 1,000,000

In the Wastewater Enterprise Fund's statement of cash flows for the year ended December 31, what amount should be reported as cash flows from investing activities? A) $ 300,000. B) $1,300,000. C) $5,300,000. D) $6,300,000. Answer: A Difficulty: 2 Medium Topic: Enterprise Funds Learning Objective: 07-05 Prepare journal entries and financial statements for an enterprise fund. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

58) The liability for general obligation bonds issued for the benefit of a governmentally owned electric utility and serviced by its earnings should be recorded in: A) An enterprise fund. B) An internal service fund. C) An enterprise fund and the business-like activities accounts. D) The governmental activities accounts. Answer: A Difficulty: 2 Medium Topic: Enterprise Funds Learning Objective: 07-05 Prepare journal entries and financial statements for an enterprise fund. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 59) The Central City Golf Course, an enterprise fund, purchased a new stove for use in the course's snack shop. The debit for the entry to record the purchase should be to: A) Expenditures. B) Purchases. C) Equipment. D) General capital assets. Answer: C Difficulty: 2 Medium Topic: Enterprise Funds Learning Objective: 07-05 Prepare journal entries and financial statements for an enterprise fund. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 60) Which of the following would be reflected in the operating statement of a proprietary fund? A) Accrual of interest expense. B) Repayment of the principal of debt. C) Issuance of debt. D) Purchase of a capital asset. Answer: A Difficulty: 2 Medium Topic: Financial Reporting Requirements Learning Objective: 07-01 Describe the characteristics and financial reporting requirements of proprietary funds. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

61) How should financial information for internal service funds be reported in the government-wide financial statements? A) As part of governmental activities. B) As part of business-type activities. C) Amounts allocated proportionately between governmental and business-type activities. D) Usually as part of governmental activities, unless the internal service fund predominantly serves one or more enterprise funds. Answer: D Difficulty: 2 Medium Topic: Financial Reporting Requirements Learning Objective: 07-01 Describe the characteristics and financial reporting requirements of proprietary funds. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 62) Which of the following account balances would only be reported if a city-owned utility followed regulatory accounting principles? A) Depreciation expense. B) Pumping expense. C) Restricted Assets—Cash. D) Utility Plant Acquisition Adjustments. Answer: D Difficulty: 2 Medium Topic: Regulatory Accounting Principles Learning Objective: 07-06 Explain special topics in accounting for the business-type activities of state and local governments. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

63) Which of the following is not a true statement about the Allowance for Funds Used During Construction (AFUDC)? A) AFUDC may have either a debt component or an equity component. B) The amount credited to AFUDC may exceed the amount of interest paid during the period on bonds issued for construction. C) AFUDC may be credited for an imputed amount of interest on the utility's own funds used for construction. D) AFUDC may include the total amount of borrowing during construction. Answer: D Difficulty: 2 Medium Topic: Regulatory Accounting Principles Learning Objective: 07-06 Explain special topics in accounting for the business-type activities of state and local governments. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 64) Which of the following items is not required to be included in the segment information that must be reported for a municipality's enterprise funds? A) Enterprise fund capital assets. B) Enterprise fund operating income or loss. C) Enterprise fund tax revenues. D) Intergovernmental operating subsidies to an enterprise fund. Answer: C Difficulty: 2 Medium Topic: Required Segment Information Learning Objective: 07-06 Explain special topics in accounting for the business-type activities of state and local governments. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

65) Under utility regulatory accounting principles (RAP), the account "Utility Plant Acquisition Adjustment" reflects: A) The difference between the amount paid for utility plant and the amount originally paid by the utility that first placed the plant into public service, less accumulated depreciation. B) The difference between the fair market value of the utility plant and the amount paid for it, less accumulated depreciation. C) The difference between the amount paid for the utility plant less its current replacement cost. D) The difference between the amount paid for the utility plant less the fair market value of its tangible plant assets. Answer: A Difficulty: 2 Medium Topic: Regulatory Accounting Principles Learning Objective: 07-06 Explain special topics in accounting for the business-type activities of state and local governments. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

66) Select the key term that relate to accounting for the business-type activities of state and local governments from the list that best matches with the following definition. A. Allowance for Funds Used during Construction B. Revenue bonds C. Utility plant acquisition adjustment D. Regulatory accounting principles E. Original cost F. Historical cost G. General obligation bonds 1. In utility accounting, the net cost for the period of construction of borrowed funds used for construction purposes and a reasonable rate on other funds so used. 2. Accounting principles prescribed by federal or state regulatory commissions for investor-owned and some governmentally owned utilities. 3. Bonds whose principal and interest are payable exclusively from earnings of a public enterprise. 4. Bonds which carry the pledge of the government entity’s full faith and credit, although the intent may be to service them from proprietary revenues rather than general taxes. 5. The account that captures the premium paid on a utility plant purchased by a government. Answer: 1. A, 2. D, 3. B, 4. G, 5. C Explanation: No further explanation details are available for this problem. Difficulty: 1 Easy Topic: Proprietary Funds Learning Objective: 07-01 Describe the characteristics and financial reporting requirements of proprietary funds.; 07-06 Explain special topics in accounting for the business-type activities of state and local governments. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

67) Explain the reporting requirements for internal service funds and enterprise funds. Internal service funds and enterprise funds are both proprietary funds, so why do their reporting requirements differ? Answer: Internal service funds and enterprise funds are presented in three proprietary fund financial statements—a statement of revenues, expenses and changes in fund net position; a statement of net position; and a statement of cash flows. Those enterprise funds considered to be major funds are presented in separate columns of the proprietary fund financial statements, with non-major enterprise funds aggregated in an Other Enterprise Funds column. All internal service funds are aggregated and reported in a single column on the fund statements. At the government-wide level the internal service funds balances are essentially collapsed into the Government Activities column of the government-wide statements. Enterprise funds are considered business-type activities and are reported in the Business-type Activities column of the government-wide statements. Internal service funds and enterprise funds are both proprietary funds and are presented as such in the funds financial statements. However, since the transactions of internal service funds primarily involve sales of goods or services to the General Fund and other funds that compose the governmental activities of a government, their financial balances are included in a single column of the proprietary fund financial statements and with governmental activities (rather than business-type activities) at the government-wide level. Difficulty: 2 Medium Topic: External Financial Reporting of Internal Service Funds Learning Objective: 07-03 Explain differences between the reporting of internal service funds in the government-wide and fund financial statements. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

68) How does the statement of cash flows under GASB standards differ from the statement of cash flows under FASB standards? Answer: FASB allows entities to prepare the statement of cash flows using either the indirect or the direct preparation method, while GASB requires the direct method. The information in the statement of cash flows is displayed using three categories under FASB standards—operating activities, investing activities, and financing activities. GASB standards provide for four categories of cash flows—operating activities, noncapital financing activities, capital and related financing activities, and investing activities. Chapter 7 gives a fairly detailed description of the types of transactions reported in each of the four GASB categories. Notice that the types of activities reported in the two financing categories and the investing category have a number of differences when compared with the comparable FASB categories. Difficulty: 2 Medium Topic: External Financial Reporting of Internal Service Funds Learning Objective: 07-01 Describe the characteristics and financial reporting requirements of proprietary funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 69) Legislators often believe an internal service fund function will not be subjected to annual legislative budget review and the legislature will "lose control" of the fund. Do you agree with this line of reasoning? Why or why not? Answer: No. As described in Chapter 7, the customers of an internal service fund are, by definition, other funds and departments of the government or of other governments. Therefore, each using fund and department must include in its appropriations budget request the justification for the amount to be spent (i.e., paid to the internal service fund) for supplies, so the legislative branch continues to exercise budgetary review over the amount each fund and department budgets for supplies. Departments and programs that require legislative appropriations to expend resources for goods and services should account for purchases of goods or services from internal suppliers (i.e., internal service funds or enterprise funds) in essentially the same manner as goods and services purchased from external suppliers. By setting pricing policies for the internal service fund and policies governing the use and retention of current earnings, the legislature can maintain considerable control over the function performed by the internal service fund but leave fund manager's freedom to operate at their discretion within the policies set by the legislative branch. Difficulty: 2 Medium Topic: Internal Service Funds Learning Objective: 07-02 Prepare journal entries and financial statements for an internal service fund. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

70) "Enterprise funds should not be permitted to accumulate unrestricted net position, since to do so would indicate overpricing of its services." Do you agree? Why or why not? Answer: No. It is in the best interest of taxpayers that enterprise funds be self-supporting. While the pricing policy should not permit the accumulation of excessive unrestricted net position, policy-makers may appropriately maintain a sufficient balance to permit replacement of inventory and capital assets (usually at increased prices), repayment of long-term debt, and acquisition or construction of assets as necessary to meet new or expanded operating needs. Difficulty: 2 Medium Topic: Enterprise Funds Learning Objective: 07-04 Explain how an enterprise fund is distinguished from an internal service fund and when an enterprise fund is required. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 71) In some local government financial reports you will find activities such as solid waste disposal and sewage disposal accounted for as a part of the General Fund. In other reports apparently identical activities are accounted for as enterprise funds. When is a government required to establish an enterprise fund? Answer: Under GASB Codification Section 1300.109, a government must report business-type activities in an enterprise fund if any of the following criteria are met: (1) The activity is financed with debt that is secured solely by a pledge of the revenues from fees and charges of an activity; (2) Laws or regulations require that the activity's costs of providing services, including capital costs (such as depreciation or debt service), be recovered with fees and charges, rather than with taxes or similar revenues; or (3) Pricing policies are designed to recover the costs of the activity, including capital costs. Difficulty: 2 Medium Topic: Enterprise Funds Learning Objective: 07-04 Explain how an enterprise fund is distinguished from an internal service fund and when an enterprise fund is required. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

72) Explain the difference between operating revenues/expenses and nonoperating revenues/expenses. Why does the GASB require that operating revenues/expenses be reported separately on proprietary statements of revenues, expenses, and changes in fund net position? Answer: GASB leaves the definition of operating and nonoperating revenues/expenses/income to management. However, guidance indicates that operating revenues and expenses are those related to the primary function or reason for the proprietary fund's existence. The operating revenues generated by a proprietary fund are based on the goods or services provided by the proprietary fund. Consequently, operating expenses are those expenses incurred in provision of the fund's primary goods or services. Nonoperating revenues and expenses are peripheral or incidental in nature to the primary function or objective of the proprietary fund. Generally, nonoperating revenues include such items as interest income, gains on sale of assets, tax revenues, and grants and gifts that can be used for operating activity. One reason for separating operating and nonoperating items is to help assess management performance. Additionally, GASB requires that operating revenues/expenses/income be separately identified on the statement of revenues, expenses and changes in fund net position since the information is necessary for classifying activity as operating, noncapital financing, capital and related financing, or investing on the statement of cash flows. Difficulty: 2 Medium Topic: Financial Reporting Requirements Learning Objective: 07-01 Describe the characteristics and financial reporting requirements of proprietary funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 73) Explain how capitalization of interest costs differs for enterprise funds as opposed to governmental funds. Answer: Unlike self-constructed general capital assets where interest capitalization is prohibited, GASB requires interest capitalization for self-constructed assets of proprietary funds. Difficulty: 2 Medium Topic: Construction Work in Progress Learning Objective: 07-04 Explain how an enterprise fund is distinguished from an internal service fund and when an enterprise fund is required. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

74) What are the alternative methods of dissolving an internal service fund? Answer: As Chapter 7 explains, dissolution of an internal service fund may be accomplished in any of three ways, or in any combinations thereof: (1) The fund's assets are transferred to another fund that will continue the operations as a subsidiary activity, (2) distribution of the fund's assets (and liabilities), in kind, to another fund or another government, and (3) liquidation of noncash assets and transferring the net cash (after settlement of liabilities) to another fund. Legal counsel should be obtained to ensure the dissolution, including distribution of assets, is according to law and legislative intent. Difficulty: 2 Medium Topic: Dissolution of an Internal Service Fund Learning Objective: 07-03 Explain differences between the reporting of internal service funds in the government-wide and fund financial statements. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

75) During the current fiscal year, the following transactions (summarized) occurred in the Town of Berthoud Information Technology Internal Service Fund: 1. Employees were paid $290,000 wages in cash. 2. Utility bills received from the Town of Berthoud's Utility Fund during the year amounted to $23,500. The amount had previously been accrued by the Utility Fund. 3. Office expenses paid in cash during the year amounted to $10,500. 4. Service supplies purchased on account during the year totaled $157,500. 5. Parts and supplies used during the year totaled $152,300 (at cost). 6. Charges to departments during the fiscal year were as follows: General Fund Street Fund

308,700 279,300

7. Payments to the Utility Fund totaled $21,800. 8. Annual depreciation totaled $30,000 for machinery and equipment. Prepare the journal entry. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

Answer:

Town of Berthoud Information Technology Fund General Journal Debits 290,000

WAGE EXPENSE CASH

Credits 290,000

UTILITY EXPENSE DUE TO OTHER FUNDS

23,500

OFFICE EXPENSES CASH

10,500

SERVICE SUPPLIES INVENTORY ACCOUNTS PAYABLE

157,500

COST OF PARTS AND SUPPLIES USED SERVICE SUPPLIES INVENTORY

152,300

DUE FROM OTHER FUNDS BILLINGS TO DEPARTMENTS

588,000

DUE TO OTHER FUNDS CASH

21,800

23,500

10,500

157,500

152,300

588,000

21,800

DEPRECIATION EXPENSE 30,000 ALLOWANCE FOR DEPRECIATION 30,000 Explanation: No further explanation details are available for this problem. Difficulty: 3 Hard Topic: Internal Service Funds Learning Objective: 07-02 Prepare journal entries and financial statements for an internal service fund. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

Accounting for Governmental and Nonprofit Entities, 18e (Reck) Chapter 8 Accounting for Fiduciary Activities—Custodial and Trust Funds 1) According to the GASB, control of an asset means the government must have the asset in its possession. Answer: FALSE Difficulty: 1 Easy Topic: Identifying Fiduciary Activities Learning Objective: 08-01 Determine when a fiduciary relationship exists. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 2) By definition a fiduciary fund that does not meet the definition of a trust fund is a custodial fund. Answer: TRUE Difficulty: 1 Easy Topic: Custodial Funds Learning Objective: 08-02 Explain the purpose, accounting, and financial reporting for commonly used custodial funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 3) Resources that are held in trust for the benefit of the government's own programs or its citizenry should be accounted for using a governmental fund rather than a fiduciary fund. Answer: TRUE Difficulty: 1 Easy Topic: Trust Funds Learning Objective: 08-03 Explain the purpose, accounting, and financial reporting for investment trust and private-purpose trust funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 4) Custodial funds are used only if a government holds resources in a custodial capacity for others. Answer: TRUE Difficulty: 1 Easy Topic: Custodial Funds Learning Objective: 08-02 Explain the purpose, accounting, and financial reporting for commonly used custodial funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 1

5) Unless otherwise prohibited custodial relationships can be reported in the General Fund rather than a custodial fund. Answer: TRUE Difficulty: 1 Easy Topic: Custodial Funds Learning Objective: 08-02 Explain the purpose, accounting, and financial reporting for commonly used custodial funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 6) The collection of taxes or other revenues by one government for several of the funds it operates and for other governments often results in the creation of a trust fund. Answer: FALSE Difficulty: 1 Easy Topic: Custodial Funds Learning Objective: 08-02 Explain the purpose, accounting, and financial reporting for commonly used custodial funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 7) Because a government does not have any administrative decision making, a custodial fund would not prepare a statement of net position. Answer: FALSE Difficulty: 1 Easy Topic: Custodial Funds Learning Objective: 08-02 Explain the purpose, accounting, and financial reporting for commonly used custodial funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

8) A custodial fund should be used to account for special assessment billing and collection, and related debt service of special assessment debt, if the government has no responsibility for the debt. Answer: TRUE Difficulty: 1 Easy Topic: Custodial Funds Learning Objective: 08-02 Explain the purpose, accounting, and financial reporting for commonly used custodial funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 9) It is common for a government that collects taxes on behalf of other governments to be authorized to withhold a certain percentage from the collections for each government. Answer: TRUE Difficulty: 1 Easy Topic: Custodial Funds Learning Objective: 08-02 Explain the purpose, accounting, and financial reporting for commonly used custodial funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 10) In regard to pass-through grants, a recipient government has administrative involvement if it is responsible for filing paperwork under a grant agreement. Answer: FALSE Difficulty: 1 Easy Topic: Custodial Funds Learning Objective: 08-02 Explain the purpose, accounting, and financial reporting for commonly used custodial funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

11) On the statement of changes in net position, custodial funds need to display on separate lines each type of addition made to the fund. Answer: FALSE Difficulty: 1 Easy Topic: Custodial Funds Learning Objective: 08-02 Explain the purpose, accounting, and financial reporting for commonly used custodial funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 12) Each trust fund type must be reported in its own column on the fiduciary fund financial statements. Answer: TRUE Difficulty: 1 Easy Topic: Illustrative Financial Statements Learning Objective: 08-04 Prepare fiduciary fund financial statements. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 13) An investment pool could be reported as a custodial fund on the fiduciary fund financial statements. Answer: TRUE Difficulty: 1 Easy Topic: Illustrative Financial Statements Learning Objective: 08-04 Prepare fiduciary fund financial statements. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 14) When an investment pool is created, the assets of each fund entering the pool should be transferred to the pool at their fair value at the date of the transfer. Answer: TRUE Difficulty: 1 Easy Topic: Investment and Private-Purpose Trust Funds Learning Objective: 08-03 Explain the purpose, accounting, and financial reporting for investment trust and private-purpose trust funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

15) Investment trust funds and pension trust funds should be accounted for in the same manner as permanent funds. Answer: FALSE Difficulty: 1 Easy Topic: Pension Trust Funds; Investment and Private-Purpose Trust Funds Learning Objective: 08-03 Explain the purpose, accounting, and financial reporting for investment trust and private-purpose trust funds.; 08-05 Explain the purpose, accounting, and financial reporting for pension trust funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 16) Custodial funds should utilize the modified accrual basis of accounting. Answer: FALSE Difficulty: 1 Easy Topic: Custodial Funds Learning Objective: 08-02 Explain the purpose, accounting, and financial reporting for commonly used custodial funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 17) Trust funds should utilize the accrual basis of accounting. Answer: TRUE Difficulty: 1 Easy Topic: Investment and Private-Purpose Trust Funds Learning Objective: 08-04 Prepare fiduciary fund financial statements. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 18) Pension trust funds should utilize budgetary accounts in the same manner as the General Fund and special revenue funds. Answer: FALSE Difficulty: 1 Easy Topic: Pension Trust Funds Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for pension trust funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

19) Fiduciary activities are reported only in the fiduciary fund financial statements; they have no effect on the governmental or business-type activities of the primary government reported in the government-wide financial statements. Answer: TRUE Difficulty: 1 Easy Topic: Introduction Learning Objective: 08-04 Prepare fiduciary fund financial statements. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 20) Earnings on pooled investments and changes in fair value of investments are allocated to the participants having an equity interest in the pool in proportion to their relative contributions to the pool. Answer: TRUE Difficulty: 2 Medium Topic: Investment and Private-Purpose Trust Funds Learning Objective: 08-03 Explain the purpose, accounting, and financial reporting for investment trust and private-purpose trust funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 21) Most investment trust funds distribute investment earnings and changes in investment values on a daily basis. Answer: FALSE Difficulty: 1 Easy Topic: Investment and Private-Purpose Trust Funds Learning Objective: 08-03 Explain the purpose, accounting, and financial reporting for investment trust and private-purpose trust funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

22) A common example of a private-purpose trust fund is a state-sponsored 529 savings plan, structured such that parents make after-tax contributions to an investment fund managed by the state government. Answer: TRUE Difficulty: 1 Easy Topic: Investment and Private-Purpose Trust Funds Learning Objective: 08-03 Explain the purpose, accounting, and financial reporting for investment trust and private-purpose trust funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 23) A defined benefit plan specifies the amount or rate of contribution that the employer and employees must contribute to the members' accounts in the pension plan. Answer: FALSE Difficulty: 1 Easy Topic: Pension Trust Funds Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for pension trust funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 24) Other postemployment benefits (OPEB) include benefits other than pensions, such as health care, life insurance, and long-term care. Answer: TRUE Difficulty: 1 Easy Topic: Other postemployment benefits Learning Objective: 08-06 Describe accounting for other postemployment benefit plans. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

25) GASB standards provide comprehensive guidance on pension accounting and financial reporting for defined benefit pension plan employers, but the FASB provides guidance for plan sponsors. Answer: FALSE Difficulty: 1 Easy Topic: Pension Trust Funds Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for pension trust funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 26) When one participant in an investment pool withdraws part of its equity from the pool, that participant's proportionate interest is decreased and all other participants' proportionate interest is increased. Answer: TRUE Difficulty: 1 Easy Topic: Investment and Private-Purpose Trust Funds Learning Objective: 08-03 Explain the purpose, accounting, and financial reporting for investment trust and private-purpose trust funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 27) Defined benefit pension plans are classified as either single-employer pension plans or multiple-employer pension plans. Answer: TRUE Difficulty: 1 Easy Topic: Pension Trust Funds Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for pension trust funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

28) Accounting for other postemployment benefits is similar to accounting for defined contribution pension plans. Answer: FALSE Difficulty: 2 Medium Topic: Other postemployment benefits Learning Objective: 08-06 Describe accounting for other postemployment benefit plans. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 29) A government needs to establish an investment policy for its investment trust fund to ensure compliance with the GASB standards. Answer: FALSE Difficulty: 1 Easy Topic: Managing Investments Learning Objective: 08-07 Understand and apply knowledge concerning sound investment policy. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 30) An investment policy should help an investment trust fund achieve maximum returns within the defined boundaries of safety and liquidity. Answer: TRUE Difficulty: 2 Medium Topic: Managing Investments Learning Objective: 08-07 Understand and apply knowledge concerning sound investment policy. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 31) The GASB requires disclosures related to three types of credit risk. Answer: FALSE Difficulty: 1 Easy Topic: Managing Investments Learning Objective: 08-07 Understand and apply knowledge concerning sound investment policy. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

32) The Internal Revenue Service limits the amount of earnings a government can make when investing the proceeds from its general obligation bonded debt. Answer: TRUE Difficulty: 1 Easy Topic: Managing Investments Learning Objective: 08-07 Understand and apply knowledge concerning sound investment policy. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 33) Each of the following are reported as fiduciary funds except: A) A permanent fund. B) An investment trust fund. C) An custodial fund. D) A private-purpose trust fund. Answer: A Difficulty: 1 Easy Topic: Introduction Learning Objective: 08-01 Determine when a fiduciary relationship exists. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 34) Which of the following statements regarding the financial reporting of custodial funds is not true? A) Custodial activities are reported only in the fiduciary fund financial statements. B) Custodial fund financial information is reported in a separate column of the government-wide statement of activities. C) Custodial funds are included in the statement of changes in fiduciary net position. D) GASB standards allow reporting on individual custodial funds in a government's combining fiduciary fund financial statements. Answer: B Difficulty: 2 Medium Topic: Custodial Funds Learning Objective: 08-02 Explain the purpose, accounting, and financial reporting for commonly used custodial funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

35) The GASB provides three criteria for determining if a fiduciary relationship exists. Which of the following four is not one of the three criterion listed by the GASB? A) The assets are controlled by the government. B) The government is not to be involved in administrative decision-making concerning the fund assets. C) The assets related to the activity of the fund were not generated by the government's exchange or nonexchange revenues. D) The government does not receive any benefit from the assets in the fund. Answer: B Difficulty: 2 Medium Topic: Identifying Fiduciary Activities Learning Objective: 08-01 Determine when a fiduciary relationship exists. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 36) Which of the following activities would most appropriately be recorded by a trust fund? A) Donations collected for improvements to the public library. B) Deposits held for customers of a municipal-owned electric utility. C) Assets held for investment, the earnings from which are used for maintenance of the City Cemetery. D) Assets held for college scholarships to be awarded to the children of police officers. Answer: D Difficulty: 2 Medium Topic: Investment and Private-Purpose Trust Funds Learning Objective: 08-03 Explain the purpose, accounting, and financial reporting for investment trust and private-purpose trust funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

37) Billing and collection of special assessments and payment of debt principal and interest on special assessment debt for which the city is not obligated in any manner should be recorded in a(an): A) Debt service fund. B) Special assessment fund. C) Capital projects fund. D) Custodial fund. Answer: D Difficulty: 1 Easy Topic: Custodial Funds Learning Objective: 08-02 Explain the purpose, accounting, and financial reporting for commonly used custodial funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 38) If special assessment receivables are recorded in the accounts of a custodial fund, the appropriate account(s) to credit upon receipt of assessments from property owners will include: A) Contributions to Net Position. B) Revenues and Deferred Revenues. C) Due to Special Assessment Bondholders—Principal. D) Interfund Transfers In. Answer: C Difficulty: 2 Medium Topic: Custodial Funds Learning Objective: 08-02 Explain the purpose, accounting, and financial reporting for commonly used custodial funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

39) A city will serve as a conduit for federal grant money, which is sent to the city by the state government and must be remitted to various not-for-profit organizations that will use the money. The ultimate allocation of the money is decided by the state government. Which of the following terms describes the nature of this grant? A) Agency grant. B) Fiduciary grant. C) Pass-through grant. D) Partial grant. Answer: C Difficulty: 2 Medium Topic: Custodial Funds Learning Objective: 08-02 Explain the purpose, accounting, and financial reporting for commonly used custodial funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 40) Which of the following activities would most appropriately be recorded by a custodial fund? A) Donations collected for improvements to the public library. B) Deposits held for customers of a municipal-owned electric utility. C) Taxes collected by a county government on behalf of cities within the county. D) Assets held for college scholarships to be awarded to the children of police officers. Answer: C Difficulty: 2 Medium Topic: Custodial Funds Learning Objective: 08-02 Explain the purpose, accounting, and financial reporting for commonly used custodial funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 41) Which of the following accounts is least likely to be used by a tax custodial fund? A) Cash. B) Revenues. C) Taxes receivable for other funds. D) Due to other governments. Answer: B Difficulty: 2 Medium Topic: Custodial Funds Learning Objective: 08-02 Explain the purpose, accounting, and financial reporting for commonly used custodial funds. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 13

42) When a cash and investment pool of a certain city was established, the debt service fund transferred investments to the pool having a cost of $3,000,000 but a current fair market value of $3,100,000. To record this transfer, a single journal entry was made by the debt service fund that included which of the following? A) A debit to Equity in Pooled Cash and Investments in the amount of $3,000,000. B) A credit to Revenues—Change in Fair Value of Investments in the amount of $100,000. C) A debit to Investments in the amount of $3,000,000. D) A credit to Investments in the amount of $3,100,000. Answer: B Difficulty: 2 Medium Topic: Investment and Private-Purpose Trust Funds Learning Objective: 08-03 Explain the purpose, accounting, and financial reporting for investment trust and private-purpose trust funds. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 43) When a cash and investment pool of a certain city was established, the debt service fund transferred investments to the pool having a cost of $3,000,000 but a current fair market value of $2,900,000. To record this transaction, a single journal entry was made by the debt service fund that included which of the following? A) A debit to Equity in Pooled Cash and Investments in the amount of $3,000,000. B) A debit to Revenues—Change in Fair Value of Investments in the amount of $100,000. C) A debit to Investments in the amount of $2,900,000. D) A credit to Investments in the amount of $100,000. Answer: B Difficulty: 2 Medium Topic: Investment and Private-Purpose Trust Funds Learning Objective: 08-03 Explain the purpose, accounting, and financial reporting for investment trust and private-purpose trust funds. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

44) The cash and investment pool of Lake City allocates dividends, interest, and capital gains and losses on a periodic basis. When the cash and investment pool accrues interest earned on investments in debt securities, pending allocation to participating funds, it would credit which of the following accounts? A) Interfund Loans. B) Revenues. C) Undistributed Earnings on Pooled Investments. D) Interfund Receivables. Answer: C Difficulty: 1 Easy Topic: Investment and Private-Purpose Trust Funds Learning Objective: 08-03 Explain the purpose, accounting, and financial reporting for investment trust and private-purpose trust funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 45) Which of these fiduciary fund types is allowed to aggregate its additions and deductions provided resources received are held for no more than three months? A) Custodial funds. B) Pension trust funds. C) Investment trust funds. D) Private-purpose trust funds. Answer: A Difficulty: 2 Medium Topic: Custodial Funds Learning Objective: 08-02 Explain the purpose, accounting, and financial reporting for commonly used custodial funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

46) Which of the statements concerning custodial funds is true? A) Custodial funds use the same basis of accounting as permanent funds. B) Custodial funds are reported only on the statement of fiduciary net position. C) Custodial funds use the temporary accounts Additions and Deductions. D) Custodial funds never receive cash. Answer: C Difficulty: 2 Medium Topic: Custodial Funds Learning Objective: 08-02 Explain the purpose, accounting, and financial reporting for commonly used custodial funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 47) Which of the following financial statements is prepared by fiduciary funds? A) Statement of fiduciary net position. B) Statement of fiduciary activities. C) Statement of fiduciary cash flows. D) All of these answers are correct. Answer: A Difficulty: 1 Easy Topic: Illustrative Financial Statements Learning Objective: 08-04 Prepare fiduciary fund financial statements. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 48) At the government-wide level, where are fiduciary funds reported? A) In the Governmental Activities column. B) In the Business-type Activities column. C) As an internal balance in the total column. D) Fiduciary funds are not reported at the government-wide level. Answer: D Difficulty: 2 Medium Topic: Introduction Learning Objective: 08-04 Prepare fiduciary fund financial statements. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

49) An investment trust fund is used to report the net position available to the: A) Sponsoring government only. B) External participants only. C) Financial institution that acts as custodian for the fund's investments. D) All of these answers are correct. Answer: B Difficulty: 2 Medium Topic: Investment and Private-Purpose Trust Funds Learning Objective: 08-03 Explain the purpose, accounting, and financial reporting for investment trust and private-purpose trust funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 50) A local civic group gave the county government $25,000 cash to be used to pay the utility bills of persons with income below the poverty level. The city should account for the $25,000 contribution in: A) An investment trust fund. B) The General Fund. C) A permanent fund. D) Private-purpose trust fund. Answer: D Difficulty: 2 Medium Topic: Investment and Private-Purpose Trust Funds Learning Objective: 08-03 Explain the purpose, accounting, and financial reporting for investment trust and private-purpose trust funds. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 51) An Olympic medalist swimmer who grew up in the city contributed $750,000 to the city stipulating that the money be invested and that the earnings thereon be used for maintenance of the swimming complex. The $750,000 would most appropriately be recorded in a(an): A) Custodial fund. B) Permanent fund. C) Private-purpose trust fund. D) Investment trust fund. Answer: B Difficulty: 2 Medium Topic: Identifying Fiduciary Activities Learning Objective: 08-01 Determine when a fiduciary relationship exists. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 17

52) A statement of cash flows should be prepared for which of the following fiduciary fund types? A) Fiduciary funds do not provide a statement of cash flows. B) Custodial. C) Pension trust. D) Private-purpose trust. Answer: A Difficulty: 2 Medium Topic: Illustrative Financial Statements Learning Objective: 08-04 Prepare fiduciary fund financial statements. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 53) Which of the following is the appropriate basis of accounting for a custodial fund? A) Cash basis. B) Modified cash basis. C) Accrual basis. D) Modified accrual basis. Answer: C Difficulty: 1 Easy Topic: Custodial Funds Learning Objective: 08-02 Explain the purpose, accounting, and financial reporting for commonly used custodial funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 54) A donor contributed $500,000 to the city stipulating that the money be invested and that the earnings thereon be used for maintenance of the a band shell in the city's park. The $500,000 would most appropriately be recorded in a(an): A) Custodial fund. B) Private-purpose trust fund. C) Endowment fund. D) Permanent fund. Answer: D Difficulty: 2 Medium Topic: Identifying Fiduciary Activities Learning Objective: 08-01 Determine when a fiduciary relationship exists. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

55) Fiduciary funds use a basis of accounting similar to which of the following funds? A) Permanent funds. B) Special revenue funds. C) Enterprise funds. D) Debt service funds. Answer: C Difficulty: 2 Medium Topic: Custodial Funds; Investment and Private-Purpose Trust Funds Learning Objective: 08-02 Explain the purpose, accounting, and financial reporting for commonly used custodial funds.; 08-03 Explain the purpose, accounting, and financial reporting for investment trust and private-purpose trust funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 56) Which of the following is the appropriate measurement focus for custodial funds? A) Economic resources. B) Current financial resources. C) Cash and cash equivalents. D) Accrual basis. Answer: A Difficulty: 1 Easy Topic: Custodial Funds Learning Objective: 08-02 Explain the purpose, accounting, and financial reporting for commonly used custodial funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 57) Which of the following activities would be recorded by a trust fund? A) Deposits held for customers of a city-owned electric utility. B) Assets passed-through the state government to the local government. C) Assets held for special assessment bondholders for which the city has no liability. D) Assets that are used to assist in the preservation of a private residence. Answer: D Difficulty: 2 Medium Topic: Investment and Private-Purpose Trust Funds Learning Objective: 08-03 Explain the purpose, accounting, and financial reporting for investment trust and private-purpose trust funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

58) Depending on the characteristics of the fund, which of the following could be reported as a trust fund or a custodial fund? A) Investment fund. B) Special assessment fund. C) Other postemployment benefit fund. D) Pass-through fund. Answer: A Difficulty: 2 Medium Topic: Investment and Private-Purpose Trust Funds Learning Objective: 08-02 Explain the purpose, accounting, and financial reporting for commonly used custodial funds. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 59) A government employer who makes contributions to pension plans for all employees: A) Reports as part of pension expenditures in the governmental fund the amount paid. B) Reports as part of pension expense of the proprietary fund the change in net pension liability. C) Recognizes pension costs in the government-wide statements on the accrual basis of accounting. D) All of these are correct. Answer: D Difficulty: 2 Medium Topic: Pension Trust Funds Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for pension trust funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

60) In financial reporting for proprietary funds and at the government-wide level, the employer's pension expense for the period is equal to: A) The employer's contribution. B) Annual required contribution. C) The change in the net pension liability adjusted for various factors including amortization of amounts related to changes in pension assumptions and differences between projected and actual earnings. D) All of these are correct. Answer: C Difficulty: 2 Medium Topic: Pension Trust Funds Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for pension trust funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 61) Which of the following statements is true regarding termination benefits? A) Voluntary termination benefits occur when employers provide an incentive to hasten an employee's voluntary termination of employment, such as a one-time payout. B) Voluntary terminations relate to layoffs or reductions in workforce. C) Employers incur expenses related to voluntary terminations but not to involuntary terminations. D) Expenses related to voluntary terminations may be avoided by hiring replacement employees within 60 days of the terminations. Answer: A Difficulty: 2 Medium Topic: Termination benefits Learning Objective: 08-06 Describe accounting for other postemployment benefit plans. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 62) Other postemployment benefits may include: A) Health care. B) Life insurance. C) Long-term care. D) All of these answers are correct. Answer: D Difficulty: 1 Easy Topic: Other postemployment benefits Learning Objective: 08-06 Describe accounting for other postemployment benefit plans. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 21

63) In pension accounting, the employer's net pension liability: A) Is measured as the total pension liability less the amount of fiduciary net position held for future pension payments. B) Represents the portion of the present value of projected benefit payments to be provided through the pension plan to current active and inactive employees that is attributed to those employees' past periods of service. C) Is the same as the net pension obligation. D) Is based on actuarial valuations generally required to be performed at least every five years. Answer: A Difficulty: 2 Medium Topic: Pension Trust Funds Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for pension trust funds. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 64) Which of the following types of risk is related to the financial ability and dependability of the issuer of debt securities? A) Custodial risk. B) Concentration risk. C) Solvency risk. D) Credit risk. Answer: D Difficulty: 2 Medium Topic: Managing Investments Learning Objective: 08-07 Understand and apply knowledge concerning sound investment policy. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

65) Which of the following statements is true regarding management of investments? A) Arbitrage rules apply only to general obligation bonds issued by governments. B) Derivatives are reported at fair value on the financial statements. C) Total return targets should be determined based solely on maximizing return. D) A sound investment strategy focuses on long-term returns of the fund. Answer: B Difficulty: 2 Medium Topic: Managing Investments Learning Objective: 08-07 Understand and apply knowledge concerning sound investment policy. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

66) Select the key term that relate to accounting for pension plans from the list that best matches with the following definition. A. Agent multiple-employer pension plan B. Cost-sharing multiple-employer pension plan C. Covered payroll D. Defined benefit plan E. Defined contribution plan F. Net pension liability G. Service cost H. Total pension liability 1. A pension plan which specifies the amount or rate of contribution that the employer and employees must contribute to the members’ accounts in the pension plan. 2. The portion of the present value of projected benefit payments to be provided through the pension plan to current active and inactive employees that is attributed to those employees’ past periods of service. 3. The portion of the actuarial present value of projected benefit payments that is attributed to the current year, interest on the total pension liability, benefit payments, and other changes to the total pension liability. 4. The pension obligations of many employers are pooled and plan assets can be used to pay the benefits of the employees of any employer that provides pensions through the pension plan. 5. Plan assets of numerous employers are pooled for investment purposes but accounts are maintained for the individual employer participants. Answer: 1. E, 2. H, 3. G, 4. B, 5. A Explanation: No further explanation details are available for this problem. Difficulty: 2 Medium Topic: Pension Trust Funds Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for pension trust funds. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

67) If a city has a responsibility for endowed resources, how would city management decide whether to account for the resources in a permanent fund or a trust fund? How does financial reporting of the funds differ? Answer: If resources entrusted to a government are specified for public purposes that benefit the general citizenry (for example, to maintain parks and cemeteries or to acquire art for public buildings), they are considered governmental rather than fiduciary activities under GASB standards. Thus, public-purpose endowments are accounted for as permanent funds. Endowments set aside for private purposes are accounted for as private-purpose trust funds. A fiduciary trust relationship exists if the assets are administered through a trust agreement that benefits recipients in accordance with the trust agreement, rather than benefits the administering government. The principal financial reporting difference is that financial information for a private-purpose trust is reported in the statement of fiduciary net position and statement of changes in fiduciary net position, whereas that for a permanent fund is reported in the balance sheet—governmental funds and statement of revenues, expenditures, and changes in fund balances—governmental funds. Difficulty: 2 Medium Topic: Trust Funds Learning Objective: 08-03 Explain the purpose, accounting, and financial reporting for investment trust and private-purpose trust funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 68) Briefly explain the difference between a custodial fund and a trust fund. Answer: Before a fund can be considered either a custodial or a trust fund it must meet the definition of a fiduciary fund. The three general criteria for determining a fiduciary relationship are (1) the assets related to the activity are controlled by the government, (2) the assets related to the activity were not generated by the government's exchange or nonexchange revenues (with the exception of pass-through grants), and (3) the government does not benefit from the assets. Once a fiduciary relationship is established it is determined if the fund is a custodial or a trust fund. The GASB defines a custodial fund as any fiduciary fund that does not meet the definition of a trust fund. To be a trust fund the GASB indicates the fund must (1) be administered through a trust agreement, (2) the assets of the trust are only used to provide benefits to the recipients in accordance with terms of the trust agreement, and (3) the assets are legally protected from the government's creditors. Difficulty: 2 Medium Topic: Identifying Fiduciary Activities; Custodial Funds; Investment and Private-Purpose Trust Funds Learning Objective: 08-02 Explain the purpose, accounting, and financial reporting for commonly used custodial funds.; 08-01 Determine when a fiduciary relationship exists.; 08-03 Explain the purpose, accounting, and financial reporting for investment trust and private-purpose trust funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 25

69) Explain the purpose of the account "undistributed change in fair value of investments" used in an investment pool. Answer: The account "undistributed change in fair value of investments" is used in a cash and investments pool trust fund to accumulate the unrealized and realized gains and losses on investments that arise when investments in the pool are revalued to fair value or sold. This is a liability account that is distributed to pool participants when a distribution to a pool participant is made. Difficulty: 2 Medium Topic: Investment and Private-Purpose Trust Funds Learning Objective: 08-03 Explain the purpose, accounting, and financial reporting for investment trust and private-purpose trust funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 70) Describe the types of pension plans most often found in governments and the differences between them. Answer: Pension plans are of two general types, defined contribution plans and defined benefit plans. A defined contribution plan specifies the amount or rate of contribution, often a percentage of covered salary, that the employer and employees must contribute to the members' accounts in the pension plan. The level of benefits payable upon retirement is determined by the total amount of contributions to a member's account and earnings on investments. Defined benefit pension plans provide a specified amount of benefits to a retiree based on a formula that may include factors such as age, salary, and years of employment. They are classified as either single-employer pension plans (pensions are provided only to employees of the employer) or multiple-employer pension plans (pension benefits are provided to the employees of more than one employer). Multiple employer plans can be further designated as agent or cost-sharing. Difficulty: 2 Medium Topic: Pension Trust Funds Learning Objective: 08-05 Explain the purpose, accounting, and financial reporting for pension trust funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

71) Kirby County established a tax custodial fund to collect property taxes for the City of Kix, the City of Denton, and Kirby County Independent School District. Total tax levies of the three governments were $200,000 for the year, of which $60,000 was for the City of Kix, $40,000 for Denton, and $100,000 for the School District. The tax custodial fund charges a 2% collection fee that it transfers to the General Fund of the County in order to cover costs incurred for custodial fund operations. During the year the tax custodial fund collected and remitted $150,000 of the $200,000 levies to the various governments. Collection fees associated with the $150,000 were remitted to Kirby County's General Fund prior to year end. For the Kirby County Tax Custodial Fund prepare the journal entries to record the taxes collected during the year and the remittances made to participating governments. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) Answer:

KIRBY COUNTY TAX CUSTODIAL FUND GENERAL JOURNAL Debits

TAXES RECEIVABLE FOR OTHER FUNDS AND GOVERNMENTS–CURRENT DUE TO OTHER FUNDS AND GOVERNMENTS

200,000 200,000

CASH 150,000 TAXES RECEIVABLE FOR OTHER FUNDS AND GOVERNMENTS–CURRENT

150,000

DUE TO OTHER FUNDS AND GOVERNMENTS DUE TO KIX DUE TO DENTON DUE TO SCHOOL DISTRICT DUE TO GENERAL FUND

150,000

DUE TO KIX DUE TO DENTON DUE TO SCHOOL DISTRICT DUE TO GENERAL FUND CASH

Credits

150,000

44,100 29,400 73,500 3,000 44,100 29,400 73,500 3,000 150,000

DEDUCTIONS–ADMINISTRATIVE FEE 3,000 DEDUCTIONS–PAYMENTS OF PROPERTY 147,000 TAXES TO OTHER GOVERNMENTS ADDITIONS–PROPERTY TAX COLLECTIONS FOR OTHER GOVERNMENTS 27

150,000

Kix Denton School district

Tax $ 60,000 40,000 100,000

Percent of Collection 2% Collection Distribution total allocated fee for GF 30% $ 45,000 $ 900 $ 44,100 20% 30,000 600 29,400 50%

75,000

1,500

73,500

Totals $200,000 $150,000 $3,000 $147,000 Difficulty: 3 Hard Topic: Custodial Funds Learning Objective: 08-02 Explain the purpose, accounting, and financial reporting for commonly used custodial funds. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

72) On January 1, Forrester County is holding investments for Tinsel Town valued at $500,000 in an investment pool, accounted for in an investment trust fund. On January 1, Valley School District invests $1,500,000 in the pool. Earnings on pooled investments for the six months ended June 30 totaling $300,000 were received in cash. 1) What percentage interest in the pool is held by the town and the school district? 2) (a) Show the entry in the Investment Trust Fund to record the School District's investment in the pool. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) (b) Show the entry in the Investment Trust Fund to summarize the collection of interest for the six-month period. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) (c) Show the entry in the Investment Trust Fund to record the distribution of the interest earned on pooled investments, assuming that the interest will be reinvested by the town and school district. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) Answer: 1) The town's interest in the pool is 25% ($500,000 / [$500,000 + $1,500,000]); the school district's interest is 75%. FORRESTER COUNTY INVESTMENT TRUST FUND GENERAL JOURNAL 2(a) CASH 1,500,000 ADDITIONS–DEPOSITS IN POOLED INVESTMENTS–VALLEY SCHOOL BOARD DISTRICT (b) CASH UNDISTRIBUTED EARNINGS ON POOLED INVESTMENTS

Debits 1,500,000

1,500,000 300,000

(c) UNDISTRIBUTED EARNINGS ON POOLED 300,000 INVESTMENTS ADDITIONS–DEPOSITS IN POOLED INVESTMENTS–VALLEY SCHOOL DISTRICT ADDITIONS–DEPOSITS IN POOLED INVESTMENTS–TINSEL TOWN Difficulty: 3 Hard Topic: Investment and Private-Purpose Trust Funds Learning Objective: 08-04 Prepare fiduciary fund financial statements. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 29

Credits

300,000

225,000 75,000

Accounting for Governmental and Nonprofit Entities, 18e (Reck) Chapter 9 Financial Reporting of State and Local Governments 1) In accordance with GASB standards, both a general purpose government and a special purpose government can be considered primary governments if certain criteria are met. Answer: TRUE Difficulty: 1 Easy Topic: The Government Reporting Entity Learning Objective: 09-01 Explain the key concepts and terms used in describing the government reporting entity. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 2) State and local governments should prepare only those financial reports required by law—generally year-end financial statements. Answer: FALSE Difficulty: 1 Easy Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 3) A financial reporting entity is defined as a primary government, as well as all other organizations that have an operational relationship with the primary government. Answer: FALSE Difficulty: 1 Easy Topic: The Government Reporting Entity Learning Objective: 09-01 Explain the key concepts and terms used in describing the government reporting entity. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

4) Both a general purpose and a special purpose government could be considered examples of primary governments under GAAP. Answer: TRUE Difficulty: 1 Easy Topic: The Government Reporting Entity Learning Objective: 09-01 Explain the key concepts and terms used in describing the government reporting entity. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 5) The three sections of the comprehensive annual financial reports of state and local governments are (1) an introductory section, (2) a financial section, and (3) a supplemental section. Answer: FALSE Difficulty: 1 Easy Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 6) A government is financially accountable for another entity if it appoints the voting majority of the entity's governing board. Answer: FALSE Difficulty: 2 Medium Topic: Reporting Component Units Learning Objective: 09-02 Apply the GASB criteria used to determine whether a potential component unit should be included in the reporting entity and, when included, the manner of reporting component units. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

7) Statistical tables included in comprehensive annual financial reports should provide social and economic data, in addition to financial data, to assist financial statement users in better understanding the activities and condition of the government. Answer: TRUE Difficulty: 1 Easy Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 8) The accounting system used by a state or local government must make it possible to prepare financial statements as required by the Financial Accounting Standards Board. Answer: FALSE Difficulty: 1 Easy Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 9) Under GASB standards, the financial statements that report on business-type activities at the government-wide level include the statement of net position, statement of activities, and statement of cash flows. Answer: FALSE Difficulty: 1 Easy Topic: Preparation of Basic Financial Statements Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

10) Fiduciary activities are not reported in the government-wide financial statements under GASB standards. Answer: TRUE Difficulty: 1 Easy Topic: Preparation of Basic Financial Statements Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 11) Special purpose accounting frameworks are considered generally accepted accounting principles (GAAP) for state and local governments. Answer: FALSE Difficulty: 1 Easy Topic: Other Financial Reporting Issues and Topics Learning Objective: 09-05 Identify and explain financial reporting issues and topics. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 12) In reconciling between the governmental fund and government-wide statements, capital assets acquired by a governmental fund are deducted from fund balance—governmental funds to arrive at net position of governmental activities. Answer: FALSE Difficulty: 2 Medium Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

13) A discretely presented component unit is presented as a major fund on the governmental fund financial statements. Answer: FALSE Difficulty: 2 Medium Topic: Reporting Component Units Learning Objective: 09-02 Apply the GASB criteria used to determine whether a potential component unit should be included in the reporting entity and, when included, the manner of reporting component units. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 14) Popular reports provide condensed financial information that can be used by governments to communicate financial results to citizens. Answer: TRUE Difficulty: 1 Easy Topic: Other Financial Reporting Issues and Topics Learning Objective: 09-05 Identify and explain financial reporting issues and topics. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 15) One of the required reconciliations in converting governmental fund financial statements to governmental activities statements at the government-wide level is an adjustment for internal service funds' assets, liabilities, operating income (loss), and transfers. Answer: TRUE Difficulty: 2 Medium Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 16) Under GASB standards, only proprietary funds prepare a statement of cash flows. Answer: TRUE Difficulty: 1 Easy Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 5

17) Similar in purpose to the International Accounting Standard Board (IASB) is the International Public Sector Accounting Standards Board. Answer: TRUE Difficulty: 1 Easy Topic: Other Financial Reporting Issues and Topics Learning Objective: 09-05 Identify and explain financial reporting issues and topics. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 18) The General Fund data for a blended component unit should be reported as a special revenue fund of the primary government. Answer: TRUE Difficulty: 1 Easy Topic: Reporting Component Units Learning Objective: 09-02 Apply the GASB criteria used to determine whether a potential component unit should be included in the reporting entity and, when included, the manner of reporting component units. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 19) Similar to for-profit entities, the GASB requires governments to prepare quarterly interim financial reports. Answer: FALSE Difficulty: 1 Easy Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

20) The GASB defines a component unit as any organization for which the primary government is financially accountable. Answer: FALSE Difficulty: 1 Easy Topic: Reporting Component Units Learning Objective: 09-02 Apply the GASB criteria used to determine whether a potential component unit should be included in the reporting entity and, when included, the manner of reporting component units. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 21) The two methods for presenting component units in the financial statements are aggregated and disaggregated. Answer: FALSE Difficulty: 1 Easy Topic: Reporting Component Units Learning Objective: 09-02 Apply the GASB criteria used to determine whether a potential component unit should be included in the reporting entity and, when included, the manner of reporting component units. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 22) To be reported as a major component unit, a component unit must meet the same 10 percent and 5 percent size requirements as major funds. Answer: FALSE Difficulty: 2 Medium Topic: Reporting Component Units Learning Objective: 09-02 Apply the GASB criteria used to determine whether a potential component unit should be included in the reporting entity and, when included, the manner of reporting component units. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

23) A not-for-profit organization could be reported as a component unit of a primary government. Answer: TRUE Difficulty: 1 Easy Topic: Reporting Component Units Learning Objective: 09-02 Apply the GASB criteria used to determine whether a potential component unit should be included in the reporting entity and, when included, the manner of reporting component units. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 24) The GASB requires that interim financial reports be prepared on a semiannual basis at a minimum. Answer: FALSE Difficulty: 1 Easy Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 25) An example of information found in the statistical section of the comprehensive annual financial report (CAFR) is demographic information such as unemployment rates, and personal income of citizens. Answer: TRUE Difficulty: 1 Easy Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

26) According to the Bureau of Census, which of the following would be considered a special district? A) Colyer Township. B) Milborne Independent School District. C) Hieher City. D) Johnston Building Authority. Answer: D Difficulty: 2 Medium Topic: The Government Reporting Entity Learning Objective: 09-01 Explain the key concepts and terms used in describing the government reporting entity. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 27) Which of the following factors would not indicate that a potential component unit (PCU) imposes a financial burden or provides a financial benefit to the primary government? A) The primary government is entitled to its share of any dividends distributed by the PCU. B) The primary government is obligated to provide financial support to the PCU. C) The primary government is obligated for the PCU's debt. D) The primary government is entitled to the PCU's resources. Answer: A Difficulty: 2 Medium Topic: Reporting Component Units Learning Objective: 09-02 Apply the GASB criteria used to determine whether a potential component unit should be included in the reporting entity and, when included, the manner of reporting component units. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

28) Which of the following circumstances would indicate that a potential component unit (PCU) should be included as part of the government financial reporting entity? A) The primary government is entitled to the resources of the PCU. B) Officials of the primary government appoint a majority of the members of the governing board of the PCU. C) The primary government significantly influences the programs and activities of the PCU. D) Officials of the primary government appoint a majority of the members of the PCU's governing board and the primary government is able to impose its will on the PCU. Answer: D Difficulty: 2 Medium Topic: Reporting Component Units Learning Objective: 09-02 Apply the GASB criteria used to determine whether a potential component unit should be included in the reporting entity and, when included, the manner of reporting component units. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 29) Which of the following is not a category found in the statistical section of the comprehensive annual financial report (CAFR)? A) Expenditure trend information. B) Revenue capacity information. C) Demographic and economic information. D) Debt capacity information. Answer: A Difficulty: 1 Easy Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

30) Combining financial statements for nonmajor funds of a government should be included: A) In the basic financial statements. B) In the notes to the financial statements. C) As a part of the financial section of the comprehensive annual financial report (CAFR). D) As part of the statistical section of the comprehensive annual financial report (CAFR). Answer: C Difficulty: 1 Easy Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 31) Which of the following would not be included within the financial section of the comprehensive annual financial report (CAFR)? A) Letter of transmittal. B) Management's discussion and analysis (MD&A). C) Independent auditor's report. D) Required supplementary information (RSI). Answer: A Difficulty: 1 Easy Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 32) Which of the following would not be provided by management's discussion and analysis (MD&A)? A) A narrative explanation of the contents of the CAFR. B) A description of the government's financial condition. C) A forecast of revenues and expenditures for the next three fiscal years. D) A discussion of economic factors and the budget and tax rates approved for the next year. Answer: C Difficulty: 1 Easy Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 11

33) Which of the following is a required program revenue category in the government-wide statement of activities? A) Special assessments. B) Operating grants and contributions. C) Sales taxes. D) Transfers. Answer: B Difficulty: 1 Easy Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 34) Which of the following would increase the governmental activities balance in Net Position—Net Investment in Capital Assets? A) Use of tax revenues to acquire a police department building. B) Issuance of long-term debt to be used to acquire equipment for the police department. C) A gift of land to the city restricted by the donor to be used by the city airport, which is accounted for as an enterprise fund. D) Recording annual depreciation on capital assets. Answer: A Difficulty: 3 Hard Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

35) Which of the following is evidence of fiscal independence for the purpose of considering whether one legally separate organization is a component unit of another? A) The potential component unit is precluded from issuing long-term debt. B) The potential component unit raises its own taxes without the approval of the primary government. C) The potential component unit names its board of directors without the approval of the primary government. D) The potential component unit sets user charges with the approval of the primary government. Answer: B Difficulty: 2 Medium Topic: Reporting Component Units Learning Objective: 09-02 Apply the GASB criteria used to determine whether a potential component unit should be included in the reporting entity and, when included, the manner of reporting component units. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 36) What constitutes the basic financial statements of a government? A) Financial section of the comprehensive annual financial report (CAFR). B) Government-wide financial statements plus notes. C) Government-wide financial statements plus fund financial statements plus notes. D) Government-wide financial statements plus fund financial statements plus notes plus required supplementary information (RSI). Answer: C Difficulty: 1 Easy Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

37) Which of the following actions is not required to convert data from the governmental fund financial statements to enable preparation of the government-wide financial statements? A) Adding annual depreciation expense proportionately to functional expense categories. B) Eliminating interfund payables and receivables between governmental funds. C) Aggregating fund information. D) Eliminating receivables and payables between governmental and enterprise funds. Answer: D Difficulty: 2 Medium Topic: Converting Accounting Information from the Modified Accrual to the Accrual Basis of Accounting Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 38) Under GASB standards, if a government only has six governmental funds and two enterprise funds how many basic financial statements would it prepare? A) Five. B) Six. C) Seven. D) Nine. Answer: C Difficulty: 3 Hard Topic: Government Financial Reports Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting 39) Which of the following is one of the three sections of a comprehensive annual financial report? A) Statistical section. B) Single audit section. C) Supplementary section. D) Investment section. Answer: A Difficulty: 1 Easy Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 14

40) Which of the following statements or schedules is most likely to be prepared by a government as an interim financial report? A) A government-wide statement of activities. B) A governmental funds balance sheet. C) A schedule of budgeted and actual expenditures. D) A schedule of cash flows for governmental funds. Answer: C Difficulty: 2 Medium Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 41) Which of the following are government-wide financial statements required by GASB standards? A) Statement of net position and statement of cash flows. B) Statement of net position, statement of activities, and statement of cash flows. C) Statement of net position and statement of activities. D) Statement of activities and statement of cash flows. Answer: C Difficulty: 1 Easy Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 42) Where should infrastructure assets and long-term liabilities issued to finance infrastructure be reported? A) Letter of transmittal. B) Fund financial statements. C) Management's discussion and analysis. D) Government-wide financial statements. Answer: D Difficulty: 2 Medium Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 15

43) Under GASB standards, where are nonmajor funds reported? A) In the management's discussion and analysis preceding the financial statements. B) In aggregate amounts in a single column in the fund financial statements. C) In a note disclosure following the financial statements. D) In the government-wide financial statements. Answer: B Difficulty: 2 Medium Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 44) GASB standards require that governmental fund financial statements include which of the following? A) Balance sheet. B) Statement of activities. C) Statement of cash flows. D) Both Balance sheet and Statement of activities. Answer: A Difficulty: 1 Easy Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

45) Balsam City's library board is appointed by the city council, which has agreed to subsidize the operating costs of the library at a material amount to be determined each year. In addition, the city is paying debt service on general obligation bonds issued to construct the library. Based on generally accepted accounting principles (GAAP) criteria for defining the reporting entity: A) The library is a component unit. B) The library is a special purpose government. C) The library is a joint venture. D) The library is a jointly governed organization. Answer: A Difficulty: 3 Hard Topic: Reporting Component Units Learning Objective: 09-02 Apply the GASB criteria used to determine whether a potential component unit should be included in the reporting entity and, when included, the manner of reporting component units. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting 46) The comprehensive annual financial report (CAFR) of a government should contain a statement of revenues, expenses, and changes in net position for: A) Both proprietary and governmental funds. B) Governmental but not proprietary funds. C) Proprietary but not governmental funds. D) Both proprietary and fiduciary funds. Answer: C Difficulty: 1 Easy Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

47) Which of the following items are typically reported differently between the governmental fund statements and the Governmental Activities column of the government-wide statements? A) Capital outlays. B) Cash collected on property taxes receivable. C) Accounts payable and other accrued expenses. D) Inventories. Answer: A Difficulty: 2 Medium Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 48) Which of the following asset amounts would be classified as restricted fund balance on the governmental funds balance sheet? A) Cash related to a federal grant for the Public Works department. B) Supplies inventory in the General Fund. C) Cash in the debt service fund that the city has set aside to pay a long-term note. D) A cash contribution that must be maintained in perpetuity. Answer: A Difficulty: 2 Medium Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 49) Some governments provide to their citizens highly condensed financial information, budget summaries, and narrative descriptions. This report is called a(an) A) Comprehensive annual financial report. B) Basic financial statements. C) Required supplementary information. D) Popular report. Answer: D Difficulty: 1 Easy Topic: Other Financial Reporting Issues and Topics Learning Objective: 09-05 Identify and explain financial reporting issues and topics. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 18

50) In reconciling the net change in fund balances to the change in net position of governmental activities which of the following would be added to the change in net position of governmental activities? A) Issuance of long-term debt. B) Construction of capital assets. C) Accrual of interest expense. D) Depreciation expense. Answer: B Difficulty: 3 Hard Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting 51) Which of the following statements concerning the reporting of internal balances by a government at the end of its fiscal year is true? A) The internal balances amounts reported in the balance sheet columns represent activity among governmental funds. B) The internal balances amounts reported in the statement of net position columns represent activity between governmental activities and business-type activities. C) The internal balances amounts are reported in both the asset and liability sections on the statement of net position. D) The internal balances amounts reported represent the difference between interfund transfers in and interfund transfers out. Answer: B Difficulty: 2 Medium Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

52) Which of the following would decrease the governmental activities balance in Net Position—Net Investment in Capital Assets? A) An increase in accumulated depreciation. B) Acquisition of a capital lease. C) Sale of a fully depreciated capital asset. D) Receipt of a capital grant that has not been expended at fiscal year-end. Answer: A Difficulty: 3 Hard Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting 53) In reconciling the total fund balances of the governmental funds to the net position of governmental activities, which of the following would be added to the net position of governmental activities? A) Accumulated depreciation. B) Premium on bonds payable. C) Construction work in progress. D) Bond interest payable. Answer: C Difficulty: 3 Hard Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

54) On the statement of revenues, expenditures, and changes in fund balance for governmental funds, how are capital outlays reported? A) As a separate line item in the expenditures section of the statement. B) Capital outlays are allocated to the functional areas, much like depreciation. C) As a separate line item in the other financing sources (uses) section of the statement. D) Below net change in fund balances, but before beginning fund balance. Answer: A Difficulty: 2 Medium Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 55) Which of the following statements concerning the reporting of expenses on the statement of activities is true? A) Expenses are reported after program revenues. B) Expenses are reported after general revenues. C) Expenses are reported after program and general revenues. D) Expenses are reported before program and general revenues. Answer: D Difficulty: 1 Easy Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

56) Which of the following statements concerning interfund transfers is true? A) Interfund transfers are reported in the statement of revenues, expenditures, and changes in fund balance when transfers occur among governmental funds. B) Interfund transfers are reported in the statement of activities when transfers occur among governmental funds. C) Interfund transfers are reported in the statement of revenues, expenditures, and changes in fund balance and the statement of activities when transfers occur among governmental funds. D) Interfund transfers are reported as internal balances on the statement of net position when activity occurs among governmental activities and business-type activities. Answer: A Difficulty: 2 Medium Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

57) For each of the following definitions, indicate the key term from the list that best matches by placing the appropriate terms. A. Component unit B. Financial reporting entity C. Financial accountability D. Joint venture E. Other stand-alone government F. Primary government 1. A separate government or agency that is combined for purposes of reporting on the whole entity 2. The responsibility that exists when a primary government appoints a voting majority of an organization's governing board and it is able to (a) impose its will on the organization or (b) there is a potential for the organization to provide financial benefits or impose a financial burden on the primary government 3. A state government, general purpose local government, or special purpose government that is independent of other state or local governments 4. A legally separate governmental organization that does not have a separately elected government body 5. Primary government and all related component units Answer: 1. A, 2. C, 3. F, 4. E, 5. B Explanation: No further explanation details are available for this problem. Difficulty: 1 Easy Topic: The Government Reporting Entity Learning Objective: 09-01 Explain the key concepts and terms used in describing the government reporting entity. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

58) For the following items that require reconciliation between governmental funds financial statements and governmental activities financial statements at the government-wide level according to GASB standards, indicate which is the best appropriate terms. (A) Always be subtracted from fund balances—governmental funds. (B) Always be added to fund balances—governmental funds. (C) May be added to or subtracted from fund balances—governmental funds in arriving at net position of governmental activities. 1. Capital assets used in governmental activities 2. Long-term liabilities that are not payable in the current period 3. Net position of internal service funds that are primarily governmental in nature 4. Accrued interest payable not due in the current period Answer: 1. B, 2. A, 3. C, 4. A Explanation: No further explanation details are available for this problem. Difficulty: 3 Hard Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Reporting

59) The following transactions relate to the City of Middleton, which has a fiscal year end of December 31. The city adopts budgets for the General Fund and the debt service fund. NOTE: for simplicity, and contrary to GASB standards, assume straight-line amortization for this problem. 1. The City of Middleton sells a $2,000,000, 3%, 16-year general obligation bond issue on January 2 at par. The bond pays interest semiannually on July 1 and January 2, with the first principal payment scheduled for next year on January 2. A city hall annex must be constructed with the bond proceeds. The bond premium must be used to pay interest on the debt. 2. Budgets are adjusted to account for the sale of the bond. The debt service fund budget should be adjusted to accommodate the new debt issue. If the debt service fund does not have sufficient resources to pay expenditures, the needed funds will be provided by the General Fund. 3. On February 1, $1,000,000 of the cash from the sale of the bonds is invested for one year at a rate of 1.26%. Earnings on the investment are available for construction of the city hall annex. 4. July 1 the first interest payment is due. 5. December 31 adjusting entries are prepared. Required: For the five related transactions provided, prepare all necessary journal entries for the affected funds and at the governmental activities level. Clearly indicate the fund journal or the government-wide journal in which the entry is being recorded. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) Answer: 1. Capital projects fund journal Cash Other Financing Source–Proceeds of Bonds

$2,000,000 $2,000,000

Governmental activities journal Cash Bonds Payable

$2,000,000 $2,000,000

2. Debt service fund journal Estimated Other Financing Sources–Interfund Transfers In Appropriations

$30,000 $30,000

General Fund journal Budgetary Fund Balance Estimated Other Financing Uses–Interfund Transfers Out

$30,000 $30,000

3. Capital projects fund journal Investments Cash

$1,000,000 $1,000,000

Governmental activities journal Investments Cash

$1,000,000 $1,000,000

4. General Fund journal Other Financing Uses–Interfund Transfer Out Cash

$30,000 $30,000

Debt service fund journal Cash Other Financing Sources–Interfund Transfer In Expenditures–Interest Cash Governmental activities journal Expenses–Interest on Long-term Debt Cash 5. Capital projects fund journal Interest Receivable Revenues–(optional to put source, Interest)

$30,000 $30,000 $30,000 $30,000 $30,000 $30,000

$11,555 $11,555

Governmental activities journal Interest Receivable $11,555 General Revenues–Investment Earnings– (optional to indicate restriction, Restricted for $11,555 Capital Projects) Expenses–Interest on Long-term Debt $30,000 Interest Payable $30,000 Debt service fund Note that there is no accrual of interest expenditure since the expenditure is not legally due until after the first of the year. Difficulty: 3 Hard Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Reporting 26

60) "Interim financial reports are needed for state and local governments even though external users of financial reports have no need to assess monthly or quarterly performance of the government." Do you agree? Why or why not? Answer: Agree. It is true that interim financial reports for governments are not widely provided to external users. However, GASB standards recommend that interim financial reports be provided periodically, mainly for use of administrators of the government, as well as to assist members of the legislative branch in monitoring current financial status and progress toward achieving the annual budget. Other users having a particular interest in the financial management of the government (e.g., news media and citizens) may find interim reports of use. Difficulty: 2 Medium Topic: Government Financial Reports Learning Objective: 09-03 Identify and describe the contents of various government financial reports. Bloom's: Understand AACSB: Communication AICPA: FN Reporting 61) What is meant by the term "reporting entity" in accounting for state and local governments? Answer: A reporting entity is defined as a primary government, organizations for which the primary government is financially accountable, and other organizations that the primary government, through the exercise of professional judgment, determines should be included to prevent the reporting entity's financial statements from being misleading. Difficulty: 2 Medium Topic: The Government Reporting Entity Learning Objective: 09-01 Explain the key concepts and terms used in describing the government reporting entity. Bloom's: Understand AACSB: Communication AICPA: FN Reporting

62) In your own words, describe the relationships between a component unit and a primary government. Provide some examples and describe the financial reporting for a component unit. Answer: A component unit is an organization for which the primary government is financially accountable or for which the primary government, through the exercise of professional judgment, determines should be included to prevent the reporting entity's financial statements from being misleading. Component units can be museums, libraries, economic development corporations, housing commissions, transit authorities that are dependent upon the primary government for funding, authorization to issue debt, and other financial decisions. The primary government exercises judgment in determining whether the results of a component unit's operations are discretely presented as a column in the reporting entity's financial statements. If not discretely presented, the component unit's operations may be reported by blending the elements into the reporting unit's financial statements. Difficulty: 3 Hard Topic: Reporting Component Units Learning Objective: 09-02 Apply the GASB criteria used to determine whether a potential component unit should be included in the reporting entity and, when included, the manner of reporting component units. Bloom's: Apply AACSB: Communication AICPA: FN Reporting 63) Describe what the government-wide statements are intended to convey to readers and contrast with the intent of the fund financial statements. Answer: Government-wide statements are designed to demonstrate operational accountability; that is, information useful in assessing operating results and short- and long-term financial position and the cost of providing government services from an economic perspective reported in entity-wide financial statements. Governmental fund financial statements are designed to demonstrate fiscal accountability; that is, current-period financial position and budgetary compliance. Proprietary fund financial statements focus on total economic resources and, like government-wide financial statements, are designed to convey operational accountability. Difficulty: 2 Medium Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Understand AACSB: Communication AICPA: FN Reporting

64) Describe the alternative processes for capturing the financial accounting information required for government-wide financial statements. Answer: There are two basic approaches to obtaining the information necessary to prepare the government-wide statements: (1) the dual-track approach which requires the accounting information system to be capable of capturing two bases of accounting (i.e., modified accrual and accrual) for each transaction as it is recorded in the underlying journals and ledgers, which is the approach presented in chapters 3-6 of the textbook and (2) conversion of fund accounting information at the end of a period (e.g., month or year) to accrual accounting, when appropriate, which is presented in Appendix A of the textbook. Difficulty: 2 Medium Topic: Converting Accounting Information from the Modified Accrual to the Accrual Basis of Accounting Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Understand AACSB: Communication AICPA: FN Reporting 65) Explain why special purpose frameworks (also known as other comprehensive bases of accounting) may be used by a state or local government instead of GASB standards, which are generally accepted accounting principles (GAAP). Answer: Some small state and local governments may conclude that the costs of complying with GAAP outweigh the benefits. Those governments may not be participants in the bond market, and therefore would not have the same set of users for their external financial statements as would governments with tax-exempt debt. Special purpose framework accounting records may be easier to prepare and easier to understand for users. Difficulty: 2 Medium Topic: Other Financial Reporting Issues and Topics Learning Objective: 09-05 Identify and explain financial reporting issues and topics. Bloom's: Understand AACSB: Communication AICPA: FN Reporting

66) Describe some items requiring adjustments when modified accrual basis accounting information must be converted to accrual basis accounting in preparation of government-wide statements. Answer: Items requiring adjustment when going from modified accrual basis of accounting to accrual basis of accounting include: (1) capital expenditures are reclassified as capital assets, (2) annual depreciation on capital assets is recognized, (3) other financing sources from bonds are reclassified as long-term liabilities, (4) interest on long-term debt is recorded, (5) internal service activity is moved from proprietary funds to be reported with governmental activities, (6) transfers and balances between funds are netted and balances between governmental and business-type activities are reported as internal balances, (7) differences that may arise from recognition of deferred inflows and deferred outflows of resources, and (8) interfund transfers between governmental funds and internal service funds are eliminated. Difficulty: 2 Medium Topic: Preparation of Basic Financial Statements Learning Objective: 09-04 Prepare governmental fund financial statements and government-wide financial statements and understand how to reconcile the two. Bloom's: Understand AACSB: Communication AICPA: FN Reporting

Accounting for Governmental and Nonprofit Entities, 18e (Reck) Chapter 10 Analysis of Government Financial Performance 1) An effective system for evaluating financial performance helps management to assess whether financial performance can meet creditor and service obligations. Answer: TRUE Difficulty: 1 Easy Topic: The Need to Evaluate Financial Performance Learning Objective: 10-01 Explain the importance of evaluating government financial performance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 2) A tax watchdog group is an example of an intermediary that represents citizen interests. Answer: TRUE Difficulty: 1 Easy Topic: The Need to Evaluate Financial Performance Learning Objective: 10-01 Explain the importance of evaluating government financial performance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 3) The key cause of municipal financial crises is the failure of management to raise taxes quickly enough in response to adverse environmental factors. Answer: FALSE Difficulty: 1 Easy Topic: Internal Financial Trend Monitoring Learning Objective: 10-03 Explain the relationships among environmental factors, organizational factors, and financial factors in determining government financial condition. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry

4) Internal managers and credit analysts evaluate financial condition of a government in the same way. Answer: FALSE Difficulty: 2 Medium Topic: Use of Benchmarks to Aid Interpretation Learning Objective: 10-05 Describe how benchmarks can aid financial analysis and identify possible sources of government information that can be helpful when benchmarking. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 5) The financial condition of a government is easily determined by calculating a set of financial ratios. Answer: FALSE Difficulty: 2 Medium Topic: Government Financial Performance Concepts Learning Objective: 10-02 Distinguish among and describe key financial performance concepts, such as: financial position, financial condition, and economic condition. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 6) The term financial position is closely related to the term liquidity. Answer: TRUE Difficulty: 2 Medium Topic: Government Financial Performance Concepts Learning Objective: 10-02 Distinguish among and describe key financial performance concepts, such as: financial position, financial condition, and economic condition. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 7) Failure to achieve interperiod equity may negatively impact a government's financial condition. Answer: TRUE Difficulty: 2 Medium Topic: Government Financial Performance Concepts Learning Objective: 10-02 Distinguish among and describe key financial performance concepts, such as: financial position, financial condition, and economic condition. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry

8) Management practices and legislative policies are very relevant in the evaluation of a government's financial performance. Answer: TRUE Difficulty: 1 Easy Topic: Internal Financial Trend Monitoring Learning Objective: 10-03 Explain the relationships among environmental factors, organizational factors, and financial factors in determining government financial condition. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 9) Environmental factors facing a government have little impact on a city's fiscal policy. Answer: FALSE Difficulty: 1 Easy Topic: Internal Financial Trend Monitoring Learning Objective: 10-03 Explain the relationships among environmental factors, organizational factors, and financial factors in determining government financial condition. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 10) Budget solvency is the government's ability to provide services at the level and quality that are required for the health, safety, and welfare of its citizens. Answer: FALSE Difficulty: 1 Easy Topic: Government Financial Performance Concepts Learning Objective: 10-02 Distinguish among and describe key financial performance concepts, such as: financial position, financial condition, and economic condition. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 11) Cash solvency is the government's long-run ability to pay all the costs of doing business. Answer: FALSE Difficulty: 1 Easy Topic: Government Financial Performance Concepts Learning Objective: 10-02 Distinguish among and describe key financial performance concepts, such as: financial position, financial condition, and economic condition. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry

12) Political culture, one of the environmental factors affecting financial condition, includes such factors as form of government and the entity's economic, political, and social history. Answer: TRUE Difficulty: 1 Easy Topic: Internal Financial Trend Monitoring Learning Objective: 10-03 Explain the relationships among environmental factors, organizational factors, and financial factors in determining government financial condition. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 13) Fiscal capacity is the government's ongoing ability and willingness to supply the capital and human resources needed to meet its commitments to provide services. Answer: FALSE Difficulty: 1 Easy Topic: Government Financial Performance Concepts Learning Objective: 10-02 Distinguish among and describe key financial performance concepts, such as: financial position, financial condition, and economic condition. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 14) Service-level solvency is the government's ability to meet its current budget by expending no more resources than were appropriated. Answer: FALSE Difficulty: 1 Easy Topic: Government Financial Performance Concepts Learning Objective: 10-02 Distinguish among and describe key financial performance concepts, such as: financial position, financial condition, and economic condition. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 15) Population demographics have an impact on financial factors such as revenue per capita. Answer: TRUE Difficulty: 1 Easy Topic: Internal Financial Trend Monitoring Learning Objective: 10-03 Explain the relationships among environmental factors, organizational factors, and financial factors in determining government financial condition. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 4

16) A large intergovernmental revenues ratio can be viewed as a positive sign concerning a government's financial condition. Answer: FALSE Difficulty: 2 Medium Topic: Analyzing Government Financial Statements Learning Objective: 10-04 Identify, calculate, interpret, and analyze key ratios that measure financial performance. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 17) One measure of interperiod equity is whether net revenues are exceeding a government's total expenses. Answer: TRUE Difficulty: 1 Easy Topic: Analyzing Government Financial Statements Learning Objective: 10-04 Identify, calculate, interpret, and analyze key ratios that measure financial performance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 18) To provide a meaningful interpretation of a financial ratio a benchmark is needed. Answer: TRUE Difficulty: 1 Easy Topic: Use of Benchmarks to Aid Interpretation Learning Objective: 10-05 Describe how benchmarks can aid financial analysis and identify possible sources of government information that can be helpful when benchmarking. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 19) Use of trend data is an acceptable method of benchmarking for governments. Answer: TRUE Difficulty: 1 Easy Topic: Use of Benchmarks to Aid Interpretation Learning Objective: 10-05 Describe how benchmarks can aid financial analysis and identify possible sources of government information that can be helpful when benchmarking. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry

20) A revenues to expenditures ratio of over 0.90 is considered acceptable. Answer: FALSE Difficulty: 2 Medium Topic: Analyzing Government Financial Statements Learning Objective: 10-04 Identify, calculate, interpret, and analyze key ratios that measure financial performance. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 21) Electronic Municipal Market Access (EMMA) is a source of all state and local government comprehensive annual financial reports (CAFRs). Answer: FALSE Difficulty: 1 Easy Topic: Use of Benchmarks to Aid Interpretation Learning Objective: 10-05 Describe how benchmarks can aid financial analysis and identify possible sources of government information that can be helpful when benchmarking. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 22) Electronic Municipal Market Access (EMMA) is an electronic database of government financial reports provided by the Securities and Exchange Commission. Answer: FALSE Difficulty: 1 Easy Topic: Use of Benchmarks to Aid Interpretation Learning Objective: 10-05 Describe how benchmarks can aid financial analysis and identify possible sources of government information that can be helpful when benchmarking. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 23) FitchRatings, Thomson Municipal Market, Standard & Poor's, and Kroll Bond Rating Agency are the four major agencies that provide credit ratings for state and local government debt. Answer: TRUE Difficulty: 1 Easy Topic: Use of Benchmarks to Aid Interpretation Learning Objective: 10-05 Describe how benchmarks can aid financial analysis and identify possible sources of government information that can be helpful when benchmarking. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 6

24) Factors common to the bond rating agencies' risk assessment are the economy and a government's debts. Answer: TRUE Difficulty: 2 Medium Topic: Use of Benchmarks to Aid Interpretation Learning Objective: 10-05 Describe how benchmarks can aid financial analysis and identify possible sources of government information that can be helpful when benchmarking. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 25) Which of the following is not a typical reason for evaluating a government's financial condition? A) Help identify and prevent financial crises from developing. B) Hold management accountable for complying with laws and regulations. C) Determine if the government can continue to offer the needed level of services. D) Determine whether residents will receive dividends. Answer: D Difficulty: 1 Easy Topic: The Need to Evaluate Financial Performance Learning Objective: 10-01 Explain the importance of evaluating government financial performance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 26) Which of the following terms is defined as determining whether current-year revenues are sufficient to pay for current-year services and whether future taxpayers will be required to assume the burdens of services previously provided? A) Financial position. B) Interperiod equity. C) Financial condition. D) Economic condition. Answer: B Difficulty: 1 Easy Topic: Government Financial Performance Concepts Learning Objective: 10-02 Distinguish among and describe key financial performance concepts, such as: financial position, financial condition, and economic condition. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry

27) The term that is closely related to the concept of liquidity is: A) Financial condition. B) Interperiod equity. C) Financial position. D) Economic condition. Answer: C Difficulty: 1 Easy Topic: Government Financial Performance Concepts Learning Objective: 10-02 Distinguish among and describe key financial performance concepts, such as: financial position, financial condition, and economic condition. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 28) According to the GASB, which of the following financial concepts can be defined as the probability that a government will meet its financial obligations, both currently and in the future? A) Financial condition. B) Financial position. C) Financial leverage. D) Liquidity. Answer: A Difficulty: 1 Easy Topic: Government Financial Performance Concepts Learning Objective: 10-02 Distinguish among and describe key financial performance concepts, such as: financial position, financial condition, and economic condition. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 29) Which of the following trends is most likely to be a signal of impending fiscal stress? A) An increasing ratio of own source revenues to total revenues. B) A decreasing ratio of total revenues to total expenditures. C) A decreasing ratio of debt service expenditures to operating revenues. D) A decreasing ratio of operating expenditures to total revenues. Answer: B Difficulty: 2 Medium Topic: Analyzing Government Financial Statements Learning Objective: 10-04 Identify, calculate, interpret, and analyze key ratios that measure financial performance. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry

30) Which of the following ratios would be most helpful in assessing the operating position of a government entity? A) Net tax-supported long-term debt/population. B) Own source revenues/total revenues. C) Debt service expenditures/total expenditures. D) General Fund balance/General Fund operating revenues. Answer: D Difficulty: 1 Easy Topic: Analyzing Government Financial Statements Learning Objective: 10-04 Identify, calculate, interpret, and analyze key ratios that measure financial performance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 31) All of the following are appropriate benchmarks for a state or local government to use as a basis for comparing performance except: A) A government's own operating results and financial position from prior years. B) International City/County Management Association's Financial Trend Monitoring System results for governments of similar types and size. C) Federal agencies' financial information for a comparable time period. D) Socioeconomic and demographic trends of governments of similar types and size available from U.S. Census Bureau. Answer: C Difficulty: 2 Medium Topic: Use of Benchmarks to Aid Interpretation Learning Objective: 10-05 Describe how benchmarks can aid financial analysis and identify possible sources of government information that can be helpful when benchmarking. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry

32) After financial ratios are calculated, the results should be compared to any of the following except: A) The same indicator from prior years. B) Budgeted information for the government for the upcoming year. C) Comparable government ratios calculated from the Government Finance Officers Association's Financial Indicators Database. D) Credit analyst measures or other red flag indicators. Answer: B Difficulty: 2 Medium Topic: Use of Benchmarks to Aid Interpretation Learning Objective: 10-05 Describe how benchmarks can aid financial analysis and identify possible sources of government information that can be helpful when benchmarking. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 33) Which of the following ratios would be considered favorable if it was low? A) Total revenues to population. B) Debt service to total revenues. C) Capital outlay from operating funds to operating expenditures. D) Cash and short-term investments to current liabilities. Answer: B Difficulty: 2 Medium Topic: Analyzing Government Financial Statements Learning Objective: 10-04 Identify, calculate, interpret, and analyze key ratios that measure financial performance. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 34) A recognizable signal of fiscal stress is: A) Total revenues from own sources increasing as a percent of total revenues for all sources. B) Increasing population. C) Declining property values. D) A decreasing ratio of total operating expenditures to population. Answer: C Difficulty: 2 Medium Topic: Analyzing Government Financial Statements Learning Objective: 10-04 Identify, calculate, interpret, and analyze key ratios that measure financial performance. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 10

35) Which of the following is a measure of the extent to which the government's business-type activities are self-supporting? A) Unrestricted net position/total revenues. B) Business-type activities revenues/business-type activities expenses. C) Total net position (governmental activities and business-type activities) less total net position at the beginning of the year divided by total beginning net position. D) Total revenues/total expenses. Answer: B Difficulty: 1 Easy Topic: Analyzing Government Financial Statements Learning Objective: 10-04 Identify, calculate, interpret, and analyze key ratios that measure financial performance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 36) A measure of whether the government lived within its means in the measurement year, or was required to use prior year resources to fund a portion of current year costs, or shifted the funding of some current year costs to future periods, is: A) Business-type activities revenues/business-type activities expenses. B) Unrestricted net position/total revenues. C) Net revenues/total expenses. D) Total net position (governmental activities and business-type activities) less total net position at the beginning of the year divided by beginning net position. Answer: C Difficulty: 1 Easy Topic: Analyzing Government Financial Statements Learning Objective: 10-04 Identify, calculate, interpret, and analyze key ratios that measure financial performance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry

37) A measure of the adequacy of the amount of the government's total unrestricted net position or deficit at the measurement date is: A) Unrestricted net position/total revenues. B) Business-type activities revenues/business-type activities expenses. C) Total net position (governmental activities and business-type activities) less total net position at the beginning of the year divided by beginning net position. D) Net revenues/total expenses. Answer: A Difficulty: 1 Easy Topic: Analyzing Government Financial Statements Learning Objective: 10-04 Identify, calculate, interpret, and analyze key ratios that measure financial performance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 38) Which of the following is one of the most important reasons for evaluating a government's financial performance? A) Determine if property taxes and other revenue sources should be increased. B) Assign responsibility for success or failure of the government to certain parties. C) Determine whether the government is accomplishing its mission. D) Have an early warning of impending financial difficulty for a diverse set of decision makers. Answer: D Difficulty: 1 Easy Topic: The Need to Evaluate Financial Performance Learning Objective: 10-01 Explain the importance of evaluating government financial performance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry

39) Which of the following terms best describes a government's ongoing ability and willingness to meet its financial obligations and service commitments as they become due? A) Financial condition. B) Fiscal capacity. C) Economic condition. D) Financial position. Answer: C Difficulty: 1 Easy Topic: Government Financial Performance Concepts Learning Objective: 10-02 Distinguish among and describe key financial performance concepts, such as: financial position, financial condition, and economic condition. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 40) Political culture, such as attitudes towards taxes, is an example in the ICMA's Financial Trend Monitoring Systems of: A) Environmental factors. B) Organizational factors. C) Financial factors. D) Management practices and legislative policies. Answer: A Difficulty: 1 Easy Topic: Internal Financial Trend Monitoring Learning Objective: 10-03 Explain the relationships among environmental factors, organizational factors, and financial factors in determining government financial condition. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry

41) Which of the following statements about credit analysts' models is true? A) Credit analysts focus primarily on demographic statistics and management's long-term investment strategies. B) Credit analysts have access to the same set of information that internal managers use. C) Credit analysts are concerned with assessing a government's ability to pay interest and principal on debt when due. D) Credit analysts rarely use comprehensive annual financial reports. Answer: C Difficulty: 1 Easy Topic: Use of Benchmarks to Aid Interpretation Learning Objective: 10-05 Describe how benchmarks can aid financial analysis and identify possible sources of government information that can be helpful when benchmarking. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 42) For which of the following is a low or decreasing value of the item associated with a stronger financial condition of a government entity? A) Unfunded pension liability. B) Property values. C) Home ownership. D) Employment rate. Answer: A Difficulty: 2 Medium Topic: Analyzing Government Financial Statements Learning Objective: 10-04 Identify, calculate, interpret, and analyze key ratios that measure financial performance. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry

43) Which ratio or concept describes the extent to which the government has lived within its means for the year? A) Debt to assets. B) Interperiod equity. C) Current ratio. D) Revenue dispersion. Answer: B Difficulty: 1 Easy Topic: Analyzing Government Financial Statements Learning Objective: 10-04 Identify, calculate, interpret, and analyze key ratios that measure financial performance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 44) Which of the following financial capability indicators is a measure of a government's capacity to issue bonded debt? A) Revenue dispersion. B) Property taxes per capita. C) Bonded debt per capita. D) Available legal debt limit. Answer: D Difficulty: 1 Easy Topic: Analyzing Government Financial Statements Learning Objective: 10-04 Identify, calculate, interpret, and analyze key ratios that measure financial performance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry

45) Which of the following governments would have publicly accessible information available through the Electronic Municipal Market Access (EMMA)? A) A city that had issued revenue bonds. B) A county that has entered into a capital lease. C) All state and local governments over 25,000 in population. D) Those state and local governments who have issued debt subject to Securities and Exchange Commission (SEC) oversight. Answer: A Difficulty: 2 Medium Topic: Use of Benchmarks to Aid Interpretation Learning Objective: 10-05 Describe how benchmarks can aid financial analysis and identify possible sources of government information that can be helpful when benchmarking. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 46) An investor could find all but one of the following pieces of information through the Electronic Municipal Market Access (EMMA). Which of the following is not available on EMMA? A) Credit rating for the debt issuance. B) Comprehensive Annual Financial Report. C) Interest rate and size of the debt issuance. D) Credit report on the government issuing the debt. Answer: D Difficulty: 2 Medium Topic: Use of Benchmarks to Aid Interpretation Learning Objective: 10-05 Describe how benchmarks can aid financial analysis and identify possible sources of government information that can be helpful when benchmarking. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry

47) Three major rating agencies (Fitch, Moody's, and Standard and Poor's) for governments have each developed quantitative tools for assessing credit risk. Which of the following general factors is used by all three rating agencies in assessing credit risk? A) Economy. B) Budgetary flexibility. C) Revenue dispersion. D) Geographic location. Answer: A Difficulty: 1 Easy Topic: Use of Benchmarks to Aid Interpretation Learning Objective: 10-05 Describe how benchmarks can aid financial analysis and identify possible sources of government information that can be helpful when benchmarking. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 48) Identify the following factors that affect financial condition as environmental factors (E) or financial factors (F).

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

Factor Community needs and resources Disaster risk Revenues Intergovernmental constraints External economic conditions Expenditures Debt structure Political culture Unfunded liabilities Condition of capital plant Operating position

E or F

Answer: 1. E, 2. E, 3. F, 4. E, 5. E, 6. F, 7. F, 8. E, 9. F, 10. F, 11. F Explanation: No further explanation details are available for this problem. Difficulty: 1 Easy Topic: Internal Financial Trend Monitoring Learning Objective: 10-03 Explain the relationships among environmental factors, organizational factors, and financial factors in determining government financial condition. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry

49) For each of the following financial ratios that are based on comprehensive annual financial report (CAFR) information by selecting the appropriate letter of the explanation for that ratio. Answers can only be used once. A. An indicator of interperiod equity. B. An indicator of the government's commitment to replacement of capital assets. C. An indicator of the government's reliance on revenues it does not directly control. D. A measure of the degree to which government assets have been funded with debt. E. An indicator of the government's ability to pay its 60- to 90-day obligations. F. A measure of the government's capacity to issue debt. G. A measure of capital asset useful service life. H. A measure of the government's liquidity. I. An indicator of taxpayer debt burden. J. An indicator of the government's ability to withstand financial emergencies. 1. General fund balances/General Fund operating revenues 2. (Cash + short-term investments)/Current liabilities 3. General obligation long-term debt/Assessed valuation 4. Capital outlay from operating funds/Operating expenditures 5. General bonded debt/Legal debt limit 6. Accumulated depreciation/Average cost of depreciable assets 7. Net revenues/Total expenses 8. Charges for services/Total revenues 9. Total liabilities/Total assets 10. Current assets/Current liabilities Answer: 1. J, 2. E, 3. I, 4. B, 5. F, 6. G, 7. A, 8. C, 9. D, 10. H Explanation: No further explanation details are available for this problem. Difficulty: 2 Medium Topic: Analyzing Government Financial Statements Learning Objective: 10-04 Identify, calculate, interpret, and analyze key ratios that measure financial performance. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry

50) Select the key term that relate to analysis of government financial performance from the list that best matches with the following definition. A. Benchmarking B. Budgetary solvency C. Cash solvency D. Economic condition E. Financial condition F. Financial position G. Fiscal capacity H. Long-run solvency I. Service capacity J. Service-level solvency 1. The probability that a government will meet its financial obligations as they become due and its service obligations to constituencies 2. A composite of a government’s financial health and its ability and willingness to meet its financial obligations and its commitments to provide services 3. The method of identifying a number that represents a target to which actual results are compared, or a basis for comparison 4. The government’s ongoing ability and willingness to raise revenues, incur debt, and meet its financial obligations as they become due 5. The adequacy of cash and short-term claims to cash to meet current obligations and those expected in the near future 6. A government’s ability to provide services at the level and quality that citizens desire 7. A government’s ability to generate enough cash over a 30- or 60-day period to pay its bills Answer: 1. E, 2. D, 3. A, 4. G, 5. F, 6. J, 7. C Explanation: No further explanation details are available for this problem. Difficulty: 1 Easy Topic: Government Financial Performance Concepts Learning Objective: 10-02 Distinguish among and describe key financial performance concepts, such as: financial position, financial condition, and economic condition. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry

51) Explain the importance of evaluating government financial performance. Answer: It is important for taxpayers, creditors, managers, legislative and oversight bodies, and others to evaluate government financial performance to detect early warning signs of impending financial difficulty. Disastrous financial crises may be able to be avoided, or at least minimized, if concerned stakeholders alert management and governing bodies to potential problems. Another reason to monitor the performance of government managers is to ensure that future generations will not have to bear the financial burden for economic decisions made by this generation. Further, monitoring government financial performance provides useful information when evaluating operating performance; that is, whether scarce resources are used efficiently and effectively to accomplish the shared goals of the government and its citizens. Difficulty: 2 Medium Topic: The Need to Evaluate Financial Performance Learning Objective: 10-01 Explain the importance of evaluating government financial performance. Bloom's: Understand AACSB: Communication AICPA: BB Industry 52) Distinguish and describe key financial performance concepts, such as financial position, financial condition, and economic condition. Answer: Financial position represents a focus on assets and liabilities that require cash or are normally converted to cash in the near future and can generally be determined from the financial statements alone. When compared with financial condition (which is more closely connected to solvency), financial position tends to be a shorter-run concept aligned with liquidity. Financial condition is the probability that a government will meet both its financial obligations and its service obligations to various stakeholders (e.g., creditors, consumers, employees, taxpayers, suppliers, constituents) as they become due and its current and future service obligations to constituents. More specifically, financial condition refers to the government's ability to maintain existing service levels, withstand economic disruptions, and meet the demands of growth, decline, and change. Economic condition is a composite of a government's financial health and its ability and willingness to meet its financial obligations and its commitments to provide services. The GASB identifies three components of economic condition: financial position, fiscal capacity, and service capacity. Difficulty: 2 Medium Topic: Government Financial Performance Concepts Learning Objective: 10-02 Distinguish among and describe key financial performance concepts, such as: financial position, financial condition, and economic condition. Bloom's: Understand AACSB: Communication AICPA: BB Industry

53) Explain the relationships among environmental factors, organizational factors, and financial factors in determining government financial condition. Answer: Environmental factors (e.g., community needs, economic conditions, intergovernmental constraints, natural disasters, and political cultures) largely determine revenue capacity and demand for services. Organizational factors include management practices and legislative policies, including fiscal policies. Financial factors (e.g., revenues, expenditures, debt, and condition of the plant) impact how fiscal policy (i.e., organizational factors) within the government responds to environmental demand and changes in the environment. Illustration 10-1 in the text displays the relationship among these three factor groupings. Difficulty: 2 Medium Topic: Internal Financial Trend Monitoring Learning Objective: 10-03 Explain the relationships among environmental factors, organizational factors, and financial factors in determining government financial condition. Bloom's: Understand AACSB: Communication AICPA: BB Industry 54) Describe how financial performance is related to the operating performance of a government entity. Answer: Good financial performance, measured by financial condition and financial position, appears to be a necessary condition to efficient and effective operations of the government. However, these components of economic condition do not ensure that a government is operating efficiently and effectively. Achieving efficient and effective use of productive resources requires innovative budgeting and management techniques. Measuring operating performance is better done through assessment of efforts and accomplishments and outcomes, rather than the ratio analyses described in Chapter 10. Difficulty: 2 Medium Topic: Internal Financial Trend Monitoring Learning Objective: 10-03 Explain the relationships among environmental factors, organizational factors, and financial factors in determining government financial condition. Bloom's: Understand AACSB: Communication AICPA: BB Industry

55) Discuss how despite significant improvements in the quality of government financial reporting over the years there are still serious, high profile public sector financial crises. How does the quality of financial reporting affect the ability to evaluate financial condition? Answer: Government financial reporting has improved considerably so that today, compliance with generally accepted accounting principles is the norm, not the exception. However, governments face complex political and social demands for public services and constraints on funding those services. High quality financial reporting certainly helps to evaluate the financial condition of a government; however, it is very difficult to predict the effects of unemployment trends, investment performance, natural disasters, and other nation-wide problems that affect state and local governments. Government financial managers, particularly through the efforts of the Government Finance Officers Association, have contributed greatly to improving the quality of financial reporting over the years along with the Governmental Accounting Standards Board. More reliable and relevant information (i.e., higher quality) is available in assessing government financial health; however, this analysis is not easy to do in an increasingly complex, national and global economic environment. Difficulty: 2 Medium Topic: Internal Financial Trend Monitoring Learning Objective: 10-03 Explain the relationships among environmental factors, organizational factors, and financial factors in determining government financial condition. Bloom's: Understand AACSB: Communication AICPA: BB Industry 56) How do the objectives of evaluating financial condition differ between internal managers and credit analysts? How are their objectives similar? Answer: Internal managers are primarily concerned with ensuring that the government has the capacity to sustain services to the community, whereas bond investors and creditors are mainly interested in assessing the ability of the government to make its principal and interest payments on debt when due. Managers and investors and creditors have similar interests in the sense that investors and creditors also are interested in the government's ability to sustain service. History has shown that in times of severe fiscal stress vital services usually take priority over debt service payments. Difficulty: 2 Medium Topic: The Need to Evaluate Financial Performance Learning Objective: 10-01 Explain the importance of evaluating government financial performance. Bloom's: Understand AACSB: Communication AICPA: BB Industry

57) "Financial statements are virtually useless in evaluating a city's financial condition." Do you agree with this statement? Why or why not? Answer: Disagree. While it is true that much useful information is provided in a comprehensive annual financial report outside the financial statements, such as the introductory section and the statistical section, the financial statements and the notes to the financial statements, which are an integral part of the statements, are essential to calculating the ratios (see, for example, Illustrations 10-3, 10-4 and 10-6) that indicate the financial health of a government. Government-wide accrual basis financial statements can provide useful information about the entity as a whole and the cost of government services and the burden placed on taxpayers to finance those services. Difficulty: 3 Hard Topic: Analyzing Government Financial Statements Learning Objective: 10-04 Identify, calculate, interpret, and analyze key ratios that measure financial performance. Bloom's: Evaluate AACSB: Communication AICPA: BB Industry 58) How do credit analysts assist decision makers in evaluating the credit worthiness of a state or local government? Answer: Credit analysts, such as those with Moody's, Standard and Poor's, FitchRatings, and Kroll Bond Rating Agency, analyze external financial statements of a government along with other available economic and demographic information, make initial assessments, compare municipalities, and then assign a bond rating to each bond a government issues. Investors considering the purchase or sale of municipal bonds use this rating to compare the risk associated with each bond relative to other municipal bonds. Difficulty: 2 Medium Topic: Use of Benchmarks to Aid Interpretation Learning Objective: 10-05 Describe how benchmarks can aid financial analysis and identify possible sources of government information that can be helpful when benchmarking. Bloom's: Understand AACSB: Communication AICPA: BB Industry

59) "Benchmarking is a simple method for comparing one government to another." Do you agree or disagree with this statement? Explain. Answer: Disagree. Benchmarking is not simple, but worth the effort as it provides valuable information in assessing the strength of one government compared to other governments. Benchmarking is a method of identifying a number that represents a target to which actual results are compared, or a basis for comparison; for example, industry averages. Difficulty: 3 Hard Topic: Use of Benchmarks to Aid Interpretation Learning Objective: 10-05 Describe how benchmarks can aid financial analysis and identify possible sources of government information that can be helpful when benchmarking. Bloom's: Evaluate AACSB: Communication AICPA: BB Industry 60) Describe some ratios that can be calculated using the basic financial statements that will help a decision maker assess the financial position of the government. Answer: Five ratios are described in Illustration 10-4 to assess financial position: (1) unrestricted net position, (2) capital asset condition, (3) debt to assets, (4) current ratio, and (5) quick ratio. These ratios focus on the ability of the government, in the short-term, to meet its current obligations. Difficulty: 2 Medium Topic: Analyzing Government Financial Statements Learning Objective: 10-04 Identify, calculate, interpret, and analyze key ratios that measure financial performance. Bloom's: Understand AACSB: Communication AICPA: BB Industry

Accounting for Governmental and Nonprofit Entities, 18e (Reck) Chapter 11 Auditing of Government and Not-for-Profit Organizations 1) When financial statements are accompanied by the report of an independent auditor, users have the assurance that the statements have been prepared in conformity with accounting and financial reporting standards established by authoritative bodies, and that all material facts have been disclosed. Answer: TRUE Difficulty: 1 Easy Topic: Financial audits by independent CPAs Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 2) Some of the auditing issues faced by auditors of government and not-for-profit entities are unique to the public sector. Answer: TRUE Difficulty: 1 Easy Topic: Financial audits by independent CPAs Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 3) The U.S. Office of Management and Budget issues generally accepted auditing standards which provide general guidelines for government audits and address the minimum responsibilities of the auditor. Answer: FALSE Difficulty: 1 Easy Topic: Government auditing standards Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

4) Auditing standards issued by the U.S. General Accountability Office include specific reference to ethical requirements relating to an audit of financial statements, however, auditing standards issued by the Auditing Standards Board do not address ethics. Answer: FALSE Difficulty: 1 Easy Topic: Government auditing standards Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 5) Governments may engage one auditor to audit the primary government and other auditors to audit certain component units. Answer: TRUE Difficulty: 1 Easy Topic: Financial audits by independent CPAs Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 6) Generally accepted government auditing standards (GAGAS) apply to financial audits of state and local governments only if they expend $750,000 or more in federal financial assistance. Answer: FALSE Difficulty: 1 Easy Topic: Governmental auditing standards Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

7) To help identify threats to independence, generally accepted government auditing standards establish a conceptual framework that requires auditors to identify, evaluate, and apply safeguards to appropriately address threats to independence. Answer: TRUE Difficulty: 1 Easy Topic: Governmental auditing standards Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 8) Performance audits are independent assessments of performance against objective criteria. Answer: TRUE Difficulty: 1 Easy Topic: Types of audits and engagements Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 9) Only state and local governments and their component units must have single audits; colleges and universities and other not-for-profit organizations that expend federal financial awards are not required to have single audits. Answer: FALSE Difficulty: 1 Easy Topic: Single audits Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

10) In evaluating an entity's system of internal controls, a material weakness is a deficiency in the design or operation of internal controls such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis. Answer: TRUE Difficulty: 1 Easy Topic: Reporting audit findings Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 11) In auditing compliance with laws and regulations as part of a single audit, the auditor must render an opinion on the specific requirements applicable to each program for which the entity receives federal financial assistance. Answer: FALSE Difficulty: 1 Easy Topic: Single audits Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 12) The introductory paragraph of the auditor's report should identify the financial statements being audited and, in particular, refer to the audit of the financial statements of each opinion unit. Answer: TRUE Difficulty: 1 Easy Topic: Format of the audit report Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

13) Required supplementary information (RSI), such as the MD&A and budgetary comparison schedules, are within the scope of a financial statement audit. Answer: FALSE Difficulty: 1 Easy Topic: Required supplementary and other information Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 14) Under generally accepted government auditing standards, safeguards are controls designed to reduce or eliminate threats to independence. Answer: TRUE Difficulty: 1 Easy Topic: Ethics and independence Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 15) The section headed "Auditor's Responsibility" in the audit report will specify whether the audit is conducted under generally accepted auditing standards or generally accepted government auditing standards. Answer: TRUE Difficulty: 1 Easy Topic: Format of the audit report Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

16) If the auditor determines that the financial statements contain a departure from GAAP, the effect of which is material, the auditor should express an unqualified opinion. Answer: FALSE Difficulty: 1 Easy Topic: Types of opinions Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 17) The AICPA's Audit and Accounting Guide, State and Local Governments, requires auditors to make separate materiality determinations for each opinion unit. Answer: TRUE Difficulty: 1 Easy Topic: Materiality for government audits Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 18) Generally accepted government auditing standards (GAGAS) require that auditors conducting a GAGAS audit complete at least 80 hours of continuing professional education (CPE) that directly contributes to the auditor's professional proficiency to perform such audit work. Answer: TRUE Difficulty: 2 Medium Topic: Government auditing standards Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

19) Guidelines for grant accounting and reporting are contained within the State and Local Government Audit and Accounting Guide, issued by the AICPA. Answer: FALSE Difficulty: 1 Easy Topic: Special topics Learning Objective: 11-04 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 20) Generally accepted government auditing standards require the auditor to report on internal control over financial reporting and compliance with laws, regulations, and provisions of contracts or grant agreements. Answer: TRUE Difficulty: 1 Easy Topic: Government auditing standards Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 21) Audits of state and local governments may be performed by all of the following except: A) Independent CPAs. B) State audit agencies. C) Federal grantor agencies. D) The Office of Management and Budget (OMB). Answer: D Difficulty: 1 Easy Topic: Financial audits by independent CPAs Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

22) Governments and not-for-profit entities may be subject to each of the following levels of audit except: A) Requirements under AICPA generally accepted auditing standards. B) Requirements under GAO generally accepted government auditing standards. C) Requirements under OMB compliance standards. D) Requirements under the Single Audit Act. Answer: C Difficulty: 2 Medium Topic: Financial audits by independent CPAs Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 23) Which of the following is a true statement about the relationship between generally accepted government auditing standards (GAGAS) and generally accepted auditing standards (GAAS)? A) GAGAS and GAAS provide standards for financial audits, attestation engagements, and performance audits. B) GAGAS encompass GAAS and supplement certain GAAS. C) GAAS encompass GAGAS and supplement certain GAGAS. D) GAGAS are promulgated by the Government Accountability Office and GAAS are promulgated by the Governmental Accounting Standards Board. Answer: B Difficulty: 2 Medium Topic: Government auditing standards Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

24) The goal(s) of a performance audit include(s) assessment of: A) Program effectiveness. B) Economy. C) Internal control compliance. D) All of these choices are correct. Answer: D Difficulty: 2 Medium Topic: Types of audits and engagements Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 25) Auditing procedures deemed particularly applicable to audits of state and local governments by independent CPAs are published in: A) The GASB codification. B) AICPA audit and accounting guides. C) GASB implementation guides. D) All of these choices are correct. Answer: B Difficulty: 1 Easy Topic: The audit process Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

26) In audits of state and local government units which of the following sections may not be required in the auditor's report for every audit? A) Auditor's Opinion section. B) Other Matters section. C) Other Information section. D) Auditor's Responsibility section. Answer: C Difficulty: 2 Medium Topic: Format of the audit report Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 27) Generally accepted government auditing standards (GAGAS) apply to all of the following audits except: A) Financial statement audits of federal organizations. B) Financial audits of not-for-profit organizations not receiving or expending federal financial awards. C) Financial audits of governments receiving and expending federal grants. D) Performance audits of federal programs. Answer: B Difficulty: 2 Medium Topic: Government auditing standards Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

28) The single audit requirement applies to: A) All audits of state and local government reporting entities. B) Financial audits of all not-for-profit entities. C) Most audits of state and local governments expending federal grant funds. D) Only those governments and not-for-profit entities that are audited by a federal audit agency. Answer: C Difficulty: 2 Medium Topic: Single audits Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 29) One of the primary purposes of the Single Audit Act of 1984 (amended in 1996) is to: A) Detect fraud, waste and abuse in government entities. B) Promote the efficient and effective use of audit resources. C) Make audit activity legal at the federal level. D) Allow federal auditors greater access to government entities receiving federal funds. Answer: B Difficulty: 2 Medium Topic: Single audits Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

30) Which of the following statements concerning the Single Audit Act of 1984 (with 1996 amendments) is correct? A) Only those entities receiving over $750,000 a year in federal financial assistance are required to have a single audit. B) Those entities expending under $750,000 a year in federal awards may be exempt from single audit requirements. C) The Single Audit Act only applies if an entity has high risk programs. D) The single audit is optional for all entities receiving federal awards. Answer: B Difficulty: 2 Medium Topic: Single audits Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 31) Threats to independence include all of the following except: A) Bias threat. B) Familiarity threat. C) Undue influence threat. D) Management representation threat. Answer: D Difficulty: 2 Medium Topic: Ethics and independence Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

32) Typical objectives of a performance audit include: A) Determining whether financial statements fairly present the entity's operational results. B) Judging the appropriateness of an entity's program goals. C) Determining whether financial statements fairly present in conformity with GAAP. D) Assessing effectiveness and results, economy and efficiency, and internal controls. Answer: D Difficulty: 1 Easy Topic: Types of audits and engagements Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 33) The purpose of an attestation engagement may include all of the following, except: A) Expressing an opinion on whether the subject matter examined is in conformity with recognized criteria. B) Expressing a conclusion about whether any information came to the attention of the auditor indicating that the subject matter reviewed conflicts with recognized criteria. C) Providing an agreed-upon procedure report on an assertion about a subject matter. D) Providing a due diligence report on compliance with laws and regulations. Answer: D Difficulty: 1 Easy Topic: Types of audits and engagements Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

34) In which section of the standard audit report does the auditor inform financial statement users that certain information, such as combining statements or budgetary comparison schedules may not have been subject to the comprehensive audit procedures? A) Auditor's Opinion section. B) Other Matters section. C) Other Information section D) Auditor's Responsibility section. Answer: C Difficulty: 2 Medium Topic: Format of the audit report Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 35) Generally accepted government auditing standards (GAGAS): A) Establish the same scope as GAAS, but use wording appropriate to government entities instead of business organizations. B) Are set forth in the Federal Government Compliance Supplement. C) Establish more standards that are broader in scope than those found in GAAS. D) Establish standard wording of auditor's reports on government financial statements. Answer: C Difficulty: 2 Medium Topic: Government auditing standards Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

36) An unmodified audit opinion rendered on a government unit's basic financial statements means those statements: A) Have been certified as free from error. B) Did not require modifications by the auditor. C) Present the entity's financial position fairly in conformity with GAAP. D) All of these choices are correct. Answer: C Difficulty: 1 Easy Topic: Types of opinions Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 37) Under the existing GAAP hierarchy for state and local government financial reporting, the GASB Implementation guides are: A) More authoritative than GASB Statements. B) Equally authoritative to GASB Technical Bulletins. C) More authoritative than the AICPA state and local government audit guide. D) Less authoritative than AICPA Practice Bulletins. Answer: B Difficulty: 2 Medium Topic: The audit process Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

38) An auditor would not render an opinion on a(an): A) Financial audit of financial statements. B) Performance audit. C) Audit to determine whether the entity has adhered to specific compliance requirements applicable to a major program. D) Audit to determine whether a government department's financial information complies with specific state regulatory requirements. Answer: B Difficulty: 2 Medium Topic: Types of audits and engagements Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 39) A single audit conducted pursuant to the Single Audit Act Amendments of 1996 requires which of the following types of audits? A) Financial Audit: Yes; Performance Audit: No B) Financial Audit: No; Performance Audit: No C) Financial Audit: No; Performance Audit: Yes D) Financial Audit: Yes; Performance Audit: Yes Answer: A Difficulty: 2 Medium Topic: Single audits Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

40) All of the following reports are included in the reporting package resulting from the single audit except: A) Financial statements and schedule of expenditures of federal awards. B) Summary schedule of prior audit findings. C) Report on efficiency and effectiveness. D) Corrective action plan. Answer: C Difficulty: 2 Medium Topic: Reports required for the single audit Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 41) Which of the following is not a required component of the audit report for a single audit? A) A report on internal control over financial reporting and compliance with federal statutes, regulations, and the terms and conditions of the federal award. B) An opinion on the completeness of the schedule of expenditures. C) A report on compliance for each major program and on internal control over compliance. D) A schedule of findings and questioned costs. Answer: B Difficulty: 1 Easy Topic: Reports required for the single audit Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

42) Which of the following best describes the relationship between generally accepted auditing standards (GAAS) and generally accepted government auditing standards (GAGAS)? A) GAAS apply to independent CPA auditors; GAGAS apply to government auditors. B) Audits conducted in conformity with GAGAS also require the auditor to conform to GAAS. C) Audits done in accordance with GAAS must also be done in accordance with GAGAS. D) Audits of state and local governments always require that the audit be conducted in accordance with both GAAS and GAGAS. Answer: B Difficulty: 2 Medium Topic: Government auditing standards Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 43) A common reason why a government might receive a "modified opinion" from the external auditors is: A) A violation of generally accepted accounting principles was noted that does not cause material misstatement of the financial statements. B) A fund balance deficit in the General Fund. C) Poor internal controls such that the accounting records could not be audited. D) Expenditures exceeded appropriations in the General Fund. Answer: C Difficulty: 2 Medium Topic: Types of audit opinions Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

44) Which of the following would not be considered Category (b) GAAP for state and local government auditees? A) AICPA Practice Bulletins if specifically made applicable to state and local governments by the AICPA and cleared by the GASB. B) GASB Technical Bulletins. C) GASB Statements. D) GASB Implementation Guides. Answer: C Difficulty: 1 Easy Topic: The audit process Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 45) Which of the following is the highest in the hierarchy of generally accepted accounting principles for federal government entities? A) AICPA Audit and Accounting Guide B) FASB emerging issues task force reports. C) GASB statements. D) FASAB statements. Answer: D Difficulty: 1 Easy Topic: The audit process Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

46) Which of the following is not considered an opinion unit requiring a materiality determination associated with a financial statement audit of a state or local government? A) Aggregate discretely presented component units. B) Investment trust fund financial statements. C) Each major governmental fund. D) Business-type activities. Answer: B Difficulty: 2 Medium Topic: Materiality for government audits Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 47) When compared to generally accepted auditing standards (GAAS), generally accepted government auditing standards (GAGAS) include additional General Standard requirements for financial audits related to all of the following except: A) Independence. B) Quality control and assurance. C) Audit opinions. D) Competence. Answer: C Difficulty: 2 Medium Topic: Government auditing standards Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

48) The fundamental ethical principles identified under generally accepted government auditing standards (GAGAS) include all of the following except: A) Public interest. B) Proper use of government information, resources, and position. C) Oath of office. D) Professional behavior. Answer: C Difficulty: 2 Medium Topic: Ethics and independence Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 49) An auditor performing nonaudit work for a client may be in danger of violating the independence rules in Government Auditing Standards when he or she provides: A) Valuation services. B) Advice on establishing or improving internal controls. C) Benchmarking information to the client. D) The client with answers to technical questions. Answer: A Difficulty: 1 Easy Topic: Ethics and independence Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

50) Under a single audit: A) An annual audit must be performed encompassing the nonfederal entity's financial statements and schedule of expenditures of federal awards. B) The audit must be conducted by an independent auditor in accordance with generally accepted government auditing standards (GAGAS) and cover the operations of the entire nonfederal entity. C) For each major program, the auditor must obtain an understanding of the internal controls pertaining to the compliance requirements for the program, assess control risk, and perform tests of controls, unless the controls are deemed to be ineffective. D) All of the given statements regarding a single audit are true. Answer: D Difficulty: 2 Medium Topic: Single audits Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 51) Under a single audit, low-risk Type A programs are identified as those: A) Audited in at least one of the three most recent audit periods as a major program. B) With no significant changes in personnel or systems that would have significantly increased risk. C) Considered low-risk by a cognizant agency. D) All of these choices are correct. Answer: B Difficulty: 2 Medium Topic: Single audits Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

52) When conducting a single audit: A) All federal grant programs must be audited. B) All major programs must be audited. C) At a minimum, all Type A major programs not identified as low-risk and certain high-risk Type B programs must be considered for audit. D) All programs not identified as low-risk must be audited. Answer: C Difficulty: 2 Medium Topic: Single audits Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 53) Which of the following statements regarding audit findings is true? A) A significant deficiency is a deficiency in internal control such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis. B) A material weakness is a deficiency in internal control important enough to merit attention by those charged with governance. C) A deficiency exists when the design or operation of a control does not allow management or employees to prevent, or detect and correct misstatements on a timely basis. D) All of the given statements are true. Answer: C Difficulty: 2 Medium Topic: Reports required for the single audit Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

54) Cognizant agencies: A) Are responsible for conducting government single audits. B) Are assigned to each nonfederal agency expending more than $50 million of federal funds per year. C) Are also referred to as oversight agencies. D) Are responsible for issuing Government Auditing Standards. Answer: B Difficulty: 2 Medium Topic: Single audits Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

55) Select the key term that relate to auditing of government and not-for-profit organizations from the list that best matches with the following definition. A. Attestation engagement B. Generally accepted auditing standards (GAAS) C. Opinion units D. Materiality E. Financial audit F. Generally accepted government auditing standards (GAGAS) G. Performance audits 1. A process that culminates in an opinion that financial statements present fairly an entity's financial position and results of operations in conformity with GAAP 2. An auditor’s judgment as to the level at which the quantitative or qualitative effects of misstatements will have a significant impact on user’s evaluations 3. Standards prescribed by the AICPA to provide guidance for planning, conducting, and reporting on audits by CPAs 4. Professional services related to internal control, compliance, MD&A presentation, allowability and reasonableness of proposed contract amounts, final contract costs, and reliability of performance measures 5. Units of the government on which the auditor expresses an opinion (e.g., governmental activities, each major governmental fund, etc.) Answer: 1. E, 2. D, 3. B, 4. A 5. C Explanation: No further explanation details are available for this problem. Difficulty: 2 Medium Topic: Government auditing topics Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process.; 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits.; 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

56) Select the key term that relate to single audits from the list that best matches with the following definition. A. Risk-based approach B. Single audit C. Questioned cost D. Material weakness E. Oversight agency F. Major programs G. Cognizant agency H. Significant deficiency 1. The federal agency that makes the predominant amount of direct funding to the nonfederal entity receiving less than $50 million in federal awards 2. A deficiency in internal control such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis 3. An audit prescribed by federal law for state and local governments and not-for-profit organizations that expend more than $750,000 in a fiscal year 4. Used by auditors to determine which programs will be audited as part of the single audit 5. A monetary item identified by an auditor in an audit finding that generally relates to noncompliance with a law, regulation, or agreement, where the costs are either not supported by adequate documentation or appear unreasonable Answer: 1. E, 2. D, 3. B, 4. A, 5. C Explanation: No further explanation details are available for this problem. Difficulty: 2 Medium Topic: Single audits Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting

57) Each of the following activities could be performed by an independent auditor. Select whether generally accepted government auditing standards deem each activity Acceptable (A), Prohibited (P), or Require conceptual framework assessment (R) in regarding to independence. 1. Reporting to those charged with governance on behalf of management. 2. Providing valuation services. 3. Researching and responding to the audited entity’s technical questions on relevant tax laws as an ancillary part of providing tax services. 4. Preparing accounting records and financial statements. 5. Providing internal control monitoring and assessments. 6. Having custody of an audited entity’s assets. 7. Setting policies and strategic direction for the audited entity. 8. Educating the audited entity on matters within the technical expertise of the auditors. Answer: 1. P, 2. R, 3. A, 4. R, 5. R, 6. P, 7. P, 8. A Explanation: No further explanation details are available for this problem. Difficulty: 2 Medium Topic: Government auditing standards Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Apply AACSB: Knowledge Application AICPA: FN Reporting 58) Audit objectives set forth by the United States Comptroller General in Government Auditing Standards (GAS or GAGAS) differ from the AICPA view (GAAS) as discussed in Chapter 11. What are some of the differences? Answer: With the release of AICPA's clarified standards and a recent revision to GAGAS, a number of the redundancies and differences between the sets of auditing standards have been eliminated. There are still differences in general standards, performance standards, and reporting standards whereby GAGAS exceeds GAAS. The differences are outlined in Illustration 11-5 and include additional guidance or requirements on independence, professional judgment, competence, quality control and assurance, audit communications, audit documentation, audit planning, report submission, and references to GAGAS in the audit report. Difficulty: 2 Medium Topic: Government auditing standards Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

59) What are the major types of audits and audit engagements described in the Government Accountability Office's Government Auditing Standards or generally accepted government auditing standards (GAGAS), and how do they differ? Answer: Government Auditing Standards, also referred to as generally accepted government auditing standards (GAGAS), define three major types of services performed by auditors: financial statement audits, attestation engagements, and performance audits. Financial audits provide an auditor's opinion that financial statements present fairly an entity's financial position, changes in financial position, and, where applicable, cash flows in conformity with generally accepted accounting principles, and informs users that they can rely on that information. Attestation engagements are examinations or reviews on subject matter that provide various levels of assurance on financial or nonfinancial matters depending upon the user's needs. Performance audits provide an auditor's independent assessment (but not an opinion) of the extent to which government officials are efficiently, economically, and effectively carrying out their responsibilities. Difficulty: 2 Medium Topic: Government auditing standards Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 60) "An unmodified opinion on the financial statements of a local government means the entirety of the comprehensive annual financial report (CAFR) has been audited and conforms with GAAP." Do you agree or disagree? Why? Answer: Disagree. The standard auditor's report expresses an opinion on the basic financial statements, but not on all statements, schedules, tables, and narrative in the comprehensive annual financial report. In some instances, by prearrangement the audit work is extended and the auditor expresses an opinion on combining and other supplementary information, as well as the basic financial statements. Difficulty: 2 Medium Topic: Financial audits by independent CPAs Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

61) When conducting a government financial statement audit, how does the auditor determine the appropriate auditing standards for the engagement? Answer: Government audits are conducted under AICPA generally accepted auditing standards (GAAS) or GAO's generally accepted government auditing standards (GAGAS). The appropriate set of standards should be established during the contracting period and specified in the audit engagement letter. While a single audit or audits of federal funds must be conducted using GAGAS, a financial statement audit may follow GAAS unless a GAGAS audit is required under law or requested by the entity under audit. Difficulty: 2 Medium Topic: Government auditing standards Learning Objective: 11-02 Explain what is meant by generally accepted government auditing standards (GAGAS), the source of GAGAS, how GAGAS are broader than GAAS, and types of GAGAS audits. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 62) What are the benefits to a state or local government of establishing an audit committee? Answer: An audit committee, when properly organized and utilized, can provide substantial benefit to all concerned parties. It can strengthen the stewardship reporting function of the governing board; it can improve communication between the independent auditor and management, thereby enhancing the auditor's independence by serving as an objective buffer between the auditor and management. For taxpayers and creditors, an audit committee can help ensure maximum value and benefit from the audit itself. Difficulty: 2 Medium Topic: Special topics Learning Objective: 11-04 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

63) Explain how federal award programs are selected for audit under the risk-based approach. Answer: The risk-based approach is applied as follows: First, the "larger" (per the sliding scale presented in Chapter 11) federal programs are identified as "Type A." All other programs are identified as "Type B" programs. Second, any low-risk Type A programs are identified. This involves auditor judgment after fully considering the factors discussed in Chapter 11. Third, high risk Type B programs are identified. However, the auditor is not expected to perform risk assessments on relatively small federal programs, as defined in Chapter 11. At a minimum, the auditor should audit as major programs all Type A programs not identified as low-risk. If a Type A program was not audited in the two most recent audit periods, it must be audited in the current period. In terms of Type B programs, the auditor is not required to identify more high-risk Type B programs than one fourth the number of low-risk Type A programs. As many major programs as necessary must be audited to ensure that at least 40% of total federal awards expended are audited. The exception is when an auditee is designated as low-risk. In that case, a low-risk auditee needs to have audited a sufficient number of major programs to encompass only 20 percent of total federal awards expended. Difficulty: 2 Medium Topic: Single audits Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

64) Answer the following questions relating to the provisions of the Single Audit Act of 1984 and 1996 amendments. (a) What is a single audit? (b) How do you determine if your government must have a single audit? (c) Where would you find authoritative guidance on conducting a single audit? Answer: (a) A single audit is an audit conducted pursuant to the requirements of the Single Audit Act Amendments of 1996 (and SAA of 1984). Such an audit is conducted on an organization-wide basis as opposed to a program specific audit. The Single Audit Act requires a financial and compliance audit but not a performance audit. (b) The Single Audit Act provides that each nonfederal entity that expends a total amount of federal awards in excess of $750,000 for the fiscal year in which the expenditure threshold is met is required to have a single audit. Federal awards is defined very broadly to include federal grants, contracts, loans, loan guarantees, property, cooperative agreements, interest subsidies, and insurance, and also includes "pass-through" assistance received from another level of government as well as that received directly. (c) OMB Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards provides guidance for the auditor conducting a single audit. These documents can be obtained from the Internet homepage of the OMB. In addition, auditors are required to use the Compliance Supplement, which details compliance auditing requirements for many federal programs. The AICPA's Audit and Accounting Guide State and Local Governments is also valuable. Difficulty: 2 Medium Topic: Single audits Learning Objective: 11-03 Explain the essentials of a single audit, including: The purpose and scope of a single audit; Major program identification; Audit work required; Reports that must be submitted. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

65) Describe the importance of materiality for auditors and explain how materiality is determined in audits of state and local governments that follow GASB standards. Answer: Materiality, in the auditor's judgment, is the level at which the quantitative or qualitative effects of misstatements will have a significant impact on users' evaluations. The AICPA Audit and Accounting Guide State and Local Governments requires auditors to make separate materiality determinations for each opinion unit. Under GASB standards these opinion units are governmental activities, business-type activities, aggregate discretely presented component units, each major governmental and enterprise fund, and the aggregate remaining fund information. Difficulty: 2 Medium Topic: Materiality for government audits Learning Objective: 11-01 Explain the essential elements of financial audits by independent CPAs, including: The objective(s) of financial audits; The source and content of generally accepted auditing standards (GAAS): Audit report formats and opinions; The audit process. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

Accounting for Governmental and Nonprofit Entities, 18e (Reck) Chapter 12 Budgeting and Performance Measurement 1) Budgeting is an important part of a manager's planning and control responsibilities in both public and private organizations. Answer: TRUE Difficulty: 1 Easy Topic: Objectives of budgeting in the public sector Learning Objective: 12-01 Explain the objectives of budgeting in the public sector. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 2) In governments, the budget has always played a role in external financial reports through the required budget-to-actual comparison schedules or statements for those funds that have a legally approved budget. Answer: TRUE Difficulty: 1 Easy Topic: Objectives of budgeting in the public sector Learning Objective: 12-01 Explain the objectives of budgeting in the public sector. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 3) The type of budgeting that relates input of resources to output of services is zero-based budgeting. Answer: FALSE Difficulty: 1 Easy Topic: Budgeting approaches Learning Objective: 12-02 Explain the differences among various budgeting approaches. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

4) Popular budgeting approaches employed by governments include incremental budgeting, performance budgeting, program budgeting, planning-programming-budgeting systems, and zero-based budgeting. Answer: TRUE Difficulty: 1 Easy Topic: Budgeting approaches Learning Objective: 12-02 Explain the differences among various budgeting approaches. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 5) Government budgets must be voted upon by citizens for approval in an annual general election. Answer: FALSE Difficulty: 1 Easy Topic: Budgeting process in a state or local government Learning Objective: 12-03 Describe the budgeting process for state or local governments. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 6) Public hearings must be held to provide adequate opportunity for citizens' input to government budgets, prior to legislative adoption of the budget. Answer: TRUE Difficulty: 1 Easy Topic: Budgeting process in a state or local government Learning Objective: 12-03 Describe the budgeting process for state or local governments. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 7) Cash planning and budgeting are important in government because the timing of cash inflows often does not necessarily coincide with the timing of cash outflows. Answer: TRUE Difficulty: 1 Easy Topic: Budgeting process in a state or local government Learning Objective: 12-02 Explain the differences among various budgeting approaches. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

8) Under GASB standards, every government, regardless of its size, is instructed to prepare a cash budget for each month of the fiscal year. Answer: FALSE Difficulty: 1 Easy Topic: Budgeting process in a state or local government Learning Objective: 12-02 Explain the differences among various budgeting approaches. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 9) Budget appropriations for governmental funds ordinarily cover only one year, while capital budgets are often multi-year. Answer: TRUE Difficulty: 1 Easy Topic: Budgeting process in a state or local government Learning Objective: 12-02 Explain the differences among various budgeting approaches. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 10) When planning, budgeting, and performance measurement are related, good performance is rewarded, and consequences exist for substandard performance. Answer: TRUE Difficulty: 1 Easy Topic: Integration of planning, budgeting, and performance measurement Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 11) Total quality management (TQM) seeks to continuously improve an organization's ability to meet or exceed customers' demands, and, as such, is useful in a government setting as well as a business setting. Answer: TRUE Difficulty: 1 Easy Topic: Managerial tools to improve performance Learning Objective: 12-05 Describe managerial tools used to improve performance. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

12) Service efforts and accomplishments measures suffer from the same problem as line-item or object-of-expenditures budgeting; that is, focusing only on resource inputs while ignoring outputs and outcomes of governmental activities. Answer: FALSE Difficulty: 1 Easy Topic: Service efforts and accomplishments Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 13) To determine which costs are allowable for charging to a federal assistance program, accountants and auditors refer to the GASB cost circular. Answer: FALSE Difficulty: 1 Easy Topic: Budget and cost issues in grant accounting Learning Objective: 12-06 Describe the budget and cost issues in grant accounting. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 14) Service efforts and accomplishments (SEA) reporting helps citizens, elected officials, appointed officials, investors and creditors, and other interested parties evaluate the government's performance in the absence of a "bottom line" measure such as exists for for-profit entities. Answer: TRUE Difficulty: 1 Easy Topic: Service efforts and accomplishments Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

15) Under service efforts and accomplishments (SEA) reporting input measures are quantity measures that reflect the quantity of a service provided, such as the number of lane-miles of road repaired. Answer: FALSE Difficulty: 1 Easy Topic: Service efforts and accomplishments Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 16) Under service efforts and accomplishments (SEA) reporting, outcome measures gauge accomplishments, or the results of services provided, such as the percentage of lane-miles of road in excellent, good, or fair condition. Answer: TRUE Difficulty: 1 Easy Topic: Service efforts and accomplishments Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 17) Despite its initial popularity, service efforts and accomplishments reporting has lost favor in recent years. Answer: FALSE Difficulty: 1 Easy Topic: Service efforts and accomplishments Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

18) A major disadvantage of activity-based costing (ABC) in a government setting is the very limited number of activities for which it can be used. Answer: FALSE Difficulty: 1 Easy Topic: Managerial tools to improve performance Learning Objective: 12-05 Describe managerial tools used to improve performance. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 19) A major advantage of activity-based costing (ABC) is that it reduces unit cost distortions arising from overhead allocations that often occur using traditional cost accounting systems. Answer: TRUE Difficulty: 1 Easy Topic: Managerial tools to improve performance Learning Objective: 12-05 Describe managerial tools used to improve performance. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 20) The sole purpose of preparing a government budget is to show compliance with laws and regulations. Answer: FALSE Difficulty: 1 Easy Topic: Objectives of budgeting in the public sector Learning Objective: 12-01 Explain the objectives of budgeting in the public sector. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 21) GASB Concepts Statement No. 2 requires state and local governments to include service efforts and accomplishments measures within the comprehensive annual financial report. Answer: FALSE Difficulty: 1 Easy Topic: Service efforts and accomplishments Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

22) Under certain circumstances a cost generally unallowable under a grant agreement may be allowable. Answer: TRUE Difficulty: 1 Easy Topic: Budget and cost issues in grant accounting Learning Objective: 12-06 Describe the budget and cost issues in grant accounting. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 23) Governments receiving federal grants and contract funds are expected to have an accounting information system with adequate internal controls that can deliver reliable information to compare the actual amount spent with budgeted amounts. Answer: TRUE Difficulty: 1 Easy Topic: Budget and cost issues in grant accounting Learning Objective: 12-06 Describe the budget and cost issues in grant accounting. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 24) The United States Office of Management and Budget (OMB) publishes uniform guidance, which provides streamlined guidelines for grant accounting and reporting. Answer: TRUE Difficulty: 1 Easy Topic: Budget and cost issues in grant accounting Learning Objective: 12-06 Describe the budget and cost issues in grant accounting. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 25) Service efforts and accomplishments reporting is also referred to as citizen-centric reporting. Answer: TRUE Difficulty: 1 Easy Topic: Service efforts and accomplishments Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

26) Which of the following statements is not consistent with the GASB's "Budgeting, Budgetary Control, and Budgetary Reporting Principle"? A) An annual budget must be adopted using generally accepted accounting principles. B) The accounting system should provide the basis for appropriate budgetary control. C) Budgetary comparisons should be presented for the General Fund and each major special revenue fund for which an annual budget has been adopted. D) The budgetary comparisons should present both the original and the final appropriated budgets for the reporting period. Answer: A Difficulty: 1 Easy Topic: Budgeting process in a state or local government Learning Objective: 12-03 Describe the budgeting process for state or local governments. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 27) The GASB "Budgeting Principle" states that an annual budget should be adopted by (for) every: A) Fiduciary fund type. B) Fund of a government. C) Governmental unit. D) Governmental fund type except special revenue funds. Answer: C Difficulty: 1 Easy Topic: Budgeting process in a state or local government Learning Objective: 12-03 Describe the budgeting process for state or local governments. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 28) A common approach to budgeting line-items whereby the current year's budget is constructed by adding or subtracting amounts expected to be required by line items is: A) Performance budgeting. B) Zero-based budgeting. C) Program budgeting. D) Incremental budgeting. Answer: D Difficulty: 1 Easy Topic: Budgeting approaches Learning Objective: 12-02 Explain the differences among various budgeting approaches. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 8

29) Which of the following is not a typical step in the budgeting process for a state or local government? A) Request by management for input on the budget. B) Review and revisions of the budget by the administrative staff of each unit. C) Public hearings for citizen input. D) Approval by a majority vote of the citizenry. Answer: D Difficulty: 2 Medium Topic: Budgeting process in a state or local government Learning Objective: 12-03 Describe the budgeting process for state or local governments. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 30) A budgeting method that derives the subsequent year's budget from the current year's budget is called: A) Planning-programming-budgeting. B) Incremental budgeting. C) Zero-based budgeting. D) Performance budgeting. Answer: B Difficulty: 1 Easy Topic: Budgeting approaches Learning Objective: 12-02 Explain the differences among various budgeting approaches. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 31) In budgeting revenues, state and local government administrators should: A) Be cautious not to utilize unauthorized sources or exceed authorized ceilings on revenues from specific sources. B) Ensure that at least the amount of revenues needed to meet spending needs are raised, even if authorized ceilings on some revenue sources must be exceeded. C) Utilize all authorized revenue sources at the maximum amount allowed by law. D) Ignore "other financing sources" since these resource inflows are not available for appropriation. Answer: A Difficulty: 2 Medium Topic: Budgeting process in a state or local government Learning Objective: 12-03 Describe the budgeting process for state or local governments. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 9

32) Cash receipts and cash disbursement budgets for a government: A) Should be prepared for all funds for the entire fiscal year. B) Should be prepared monthly or as needed to enhance cash management, investment management, and short-term debt management. C) Should be prepared for only those funds for which appropriations budgets are required by law to be prepared on the accrual basis or the modified accrual basis. D) Should be prepared for only those funds for which appropriations budgets are not required by law. Answer: B Difficulty: 2 Medium Topic: Budgeting process in a state or local government Learning Objective: 12-03 Describe the budgeting process for state or local governments. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 33) Cash disbursement budgets: A) Are prepared to facilitate the preparation of government-wide financial statements. B) Are usually prepared for each month of the year, or for shorter intervals, in order to facilitate planning short-term borrowings and investments. C) Are prepared only for funds not required to operate under legal appropriation budgets. D) Are prepared only for each fiscal year because disbursements for each month are approximately equal. Answer: B Difficulty: 2 Medium Topic: Budgeting process in a state or local government Learning Objective: 12-03 Describe the budgeting process for state or local governments. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 34) The schedule of legally required events in the budgeting process is generally referred to as the: A) Budget docket. B) Legal timetable. C) Hearing schedule. D) Budget calendar. Answer: D Difficulty: 1 Easy Topic: Budgeting process in a state or local government Learning Objective: 12-03 Describe the budgeting process for state or local governments. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 10

35) Effective capital budgeting for general capital assets of a government requires: A) Intermediate and long-range capital improvement plans for general capital assets. B) Nonfinancial information on physical measures and service condition of capital assets of component units. C) Consideration of how proprietary fund capital projects will be financed. D) Information about the capital asset needs of a motor pool accounted for as an internal service fund. Answer: A Difficulty: 2 Medium Topic: Budgeting process in a state or local government Learning Objective: 12-03 Describe the budgeting process for state or local governments. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 36) Which of the following statements regarding government budgets is not true? A) A budget should be enacted before the fiscal year begins and be integrated with the financial accounting system so that actual results can be compared to budgets at regular intervals. B) The budget's role is limited to inclusion in internal financial reports and budgetary compliance monitoring for those funds that have a legally approved budget. C) Integrating the budget into the accounting system allows management to oversee individual unit performance and react quickly to variances between actual results and budgeted plans. D) A budget is a plan of financial operation embodying an estimate of proposed expenditures for a given period of time and the proposed means of financing them. Answer: B Difficulty: 2 Medium Topic: Objectives of budgeting in the public sector Learning Objective: 12-01 Explain the objectives of budgeting in the public sector. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

37) Which of the following might appropriately be termed an outcome indicator for a police department that reports service efforts and accomplishments (SEA) indicators? A) Number of crimes investigated. B) Decrease in burglaries. C) Hours of patrol. D) Number of personnel hours expended. Answer: B Difficulty: 2 Medium Topic: Service efforts and accomplishments Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 38) Which of the following statements regarding service efforts and accomplishments (SEA) is not true? A) SEA information includes indicators of a government's actual performance in providing services to its citizens. B) As governments integrate strategic planning, budgeting, and performance measurement, information on SEA is available and often provided to the public. C) SEA reporting may take the form of a published report, an electronic report posted on a government's website, or a pamphlet designed to summarize an entity's SEA measurement results. D) SEA reporting is required by governments with populations greater than 500,000. Answer: D Difficulty: 2 Medium Topic: Service efforts and accomplishments Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

39) Which of the following statements is not true? A) A balanced scorecard is an integrated set of performance targets, both financial and nonfinancial, that are derived from an organization's strategies about how to achieve its goals. B) Total quality management (TQM) seeks to continuously improve the government's ability to meet or exceed demands from customers who might be external, such as taxpayers and service recipients, or internal, such as the customers of an internal service fund. C) Service efforts and accomplishments (SEA) reporting links customer (taxpayer and other resource provider) satisfaction to improvements in the operating systems and processes used to provide goods and services. D) Customer relationship management (CRM) systems create an integrated view of a customer to coordinate services from all channels of the organization with the intent to improve the long-term relationship the organization has with its customer. Answer: C Difficulty: 2 Medium Topic: Managerial tools to improve performance Learning Objective: 12-05 Describe managerial tools used to improve performance. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 40) The number of lane-miles of road repaired to a specified minimum condition is an example of an: A) Output measure. B) Input measure. C) Outcome measure. D) Efficiency measure. Answer: A Difficulty: 2 Medium Topic: Service efforts and accomplishments Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

41) Service efforts and accomplishments (SEA) information: A) Includes indicators of a government's actual performance in providing services to its citizens. B) Aids users in assessing the economy, efficiency, and effectiveness of government. C) Is required for all governments that issue a CAFR. D) Both includes indicators of a government's actual performance in providing services to its citizens and aids users in assessing the economy, efficiency, and effectiveness of government are true. Answer: D Difficulty: 2 Medium Topic: Service efforts and accomplishments Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 42) Balanced scorecards integrate all of the following into a document that can be shared with employees and stakeholders except: A) GASB financial reporting standards. B) Internal business processes measures. C) Nonfinancial measures, such as customer satisfaction. D) Financial performance measures. Answer: A Difficulty: 2 Medium Topic: Managerial tools to improve performance Learning Objective: 12-05 Describe managerial tools used to improve performance. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 43) Which of the following has contributed most to governments' interest in activity-based costing? A) GASB standards. B) Implementation of innovative management approaches (such as TQM and SEA measures) in response to public demand for greater accountability and productivity. C) Increased demand for high profile management tools to bolster the image of government. D) The enactment of Sarbanes-Oxley legislation. Answer: B Difficulty: 2 Medium Topic: Managerial tools to improve performance Learning Objective: 12-05 Describe managerial tools used to improve performance. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 14

44) All of the following are objectives of activity-based cost (ABC) accounting in government except: A) To preserve, at a minimum, the present quality and availability of services. B) To help find lower cost alternatives to providing services. C) To link customer (taxpayer) satisfaction to improvements in the operating systems used to provide goods and services. D) To make increases in the volume of services dependent on reducing costs. Answer: C Difficulty: 2 Medium Topic: Managerial tools to improve performance Learning Objective: 12-05 Describe managerial tools used to improve performance. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 45) Efficiency measures, as the term is used in the service efforts and accomplishments (SEA) literature, can be described as: A) Measures that relate the quantity or cost of resources used to units of output. B) Measures that relate to the amount of financial and nonfinancial resources used in a program or process. C) Measures that relate costs to outcomes. D) Measures that reflect either the quantity or quality of a service provided. Answer: A Difficulty: 2 Medium Topic: Service efforts and accomplishments Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

46) The GASB identifies which of the following three broad categories of service efforts and accomplishments (SEA) measures: A) Measures of service efforts, measures of service accomplishments, and measures of efficiency. B) Measures of service efforts and accomplishments, measures of service efficiency, and measures of service effectiveness. C) Measures of service efforts, measures of service accomplishments, and measures of the costs of service efforts and accomplishments. D) Measures of service efforts, measures of service accomplishments, and measures that relate efforts to accomplishments. Answer: D Difficulty: 2 Medium Topic: Service efforts and accomplishments Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 47) Which of the following statements regarding service efforts and accomplishments (SEA) is not true? A) Measures of service efforts, or input measures, relate to the amount of financial and nonfinancial resources (such as money and materials) used in a program or process. B) Effort measures relate service efforts to outputs of service and to outcomes or results of services. C) Output measures are quantity measures that reflect either the quantity of a service provided or the quantity of service provided that meets a specified quality requirement. D) Outcome measures gauge accomplishments, or the results of services provided. Answer: B Difficulty: 1 Easy Topic: Service efforts and accomplishments Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

48) State and local governments and not-for-profit organizations that receive grants or contracts from the federal government should charge costs of these grants or contracts in conformity with: A) Cost Accounting Standards Board standards. B) Office of Management and Budget circulars. C) Financial Accounting Standards Board standards. D) Governmental Accounting Standards Board standards. Answer: B Difficulty: 2 Medium Topic: Budget and cost issues in grant accounting Learning Objective: 12-06 Describe the budget and cost issues in grant accounting. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 49) Which of the following statements regarding costs under federal awards is not true? A) Only items of cost specifically mentioned in a grant, contract, or other agreement document are allowable. B) Several costs are allowable under highly restrictive conditions and generally require the explicit approval of the grantor agency. C) For major not-for-profit organizations and institutions of higher learning, indirect costs must be classified within two broad categories termed "facilities" and "administration." D) Direct costs are those that can be identified specifically with a particular cost objective. Answer: A Difficulty: 2 Medium Topic: Budget and cost issues in grant accounting Learning Objective: 12-06 Describe the budget and cost issues in grant accounting. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 50) Which of the following is not one of the criteria for an allowable cost under a federal grant? A) A cost that is necessary and reasonable for the performance of the federal award and allocable thereto under the OMB cost principles. B) A cost that conforms to any limitations or exclusions set forth in the OMB cost principles or in the federal award as to types or amount of cost items. C) A cost that has been approved by the FASB or GASB as an allowable cost. D) A cost that is adequately documented. Answer: C Difficulty: 2 Medium Topic: Budget and cost issues in grant accounting Learning Objective: 12-06 Describe the budget and cost issues in grant accounting. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 17

51) For each of the following definitions, indicate the key term from the list that best matches by placing the appropriate definition. A. Efficiency measures B. Effectiveness measures C. Planning-programming-budgeting system D. Zero-based budgeting E. Program budgeting F. Flexible budgeting G. Incremental budgeting H. Budget calendar 1. A budget in which each activity and the amounts of resources requested for each activity must be justified each year 2. A budget that is derived from the current year budget by adding or subtracting amounts expected to be required by line-items 3. A budgeting approach that integrates various elements of planning for programs 4. Measures that relate efforts to accomplishments 5. A budget in which resource inputs and service outputs are identified by programs Answer: 1. D, 2. G, 3. C, 4. A, 5. E Explanation: No further explanation details are available for this problem. Difficulty: 2 Medium Topic: Budgeting approaches Learning Objective: 12-02 Explain the differences among various budgeting approaches. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

52) For each of the following definitions, indicate the key term from the list that best matches by placing the appropriate definition. A. Allowable costs B. Cost principle C. Cost objective D. Indirect costs E. Direct costs F. Activity-based costing 1. A system that identifies specific costs that drive the cost of service or production activities 2. Costs incurred that cannot be identified specifically with a cost objective 3. Costs that meet specific criteria determined by the resource provider 4. A program, function, activity, award, organizational subdivision, contract, or work unit established for the accumulation of costs Answer: 1. F, 2. D, 3. A, 4. C Explanation: No further explanation details are available for this problem. Difficulty: 2 Medium Topic: Budget and cost issues in grant accounting Learning Objective: 12-06 Describe the budget and cost issues in grant accounting. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 53) Are governments required to report their budgets externally? Explain. Answer: Most governments publish a stand-alone budget document for each budget cycle. They will also publish preliminary and final budget information in local newspapers. In terms of external reporting, budget-to-actual statements or schedules (for the General Fund and major special revenue funds with a legally adopted budget) are presented as supplementary information or as a more traditional statement that compares budgeted to actual operating performance within the basic financial statements. Difficulty: 2 Medium Topic: Objectives of budgeting in the public sector Learning Objective: 12-01 Explain the objectives of budgeting in the public sector. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

54) Explain how strategic planning, budgeting, and performance measurement can be integrated in a government and why this integration is desirable. Answer: To integrate strategic planning, budgeting, and performance measurement a government sets a direction for the organization through a strategic plan, develops programs and activities, designs performance measures, budgets in such a way that shows resources used are expected to result in accomplishments, monitors operations, and then evaluates and reports on actual results compared to the plan. These steps are repeated in a cycle that provides feedback to stakeholders to whom the managers are accountable. Feedback is then incorporated into the next strategic plan. An integrated system of planning-budgeting-performance measurement is desirable because it requires managers to clearly identify targeted outputs and outcomes, to be transparent to all internal and external stakeholders about those desired outputs and outcomes, and to provide leadership and written policies about how to attain goals. An integrated system is more likely to lead the government to achieve its goals and objectives than a disaggregated set of planning, budgeting, and measurement systems. Difficulty: 2 Medium Topic: Integration of planning, budgeting, and performance measurement Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 55) What budgeting approach requires justification for the inclusion of every activity each year? Briefly describe this method and how it can be effective. Answer: The budgeting approach described is zero-based budgeting (ZBB). Under this approach the basic concept is that each program must periodically be justified from scratch. This approach can overcome one of the fundamental weaknesses of incremental budgeting; namely that programs tend to be continued long after they have outlived their usefulness. Practically, however, since many government services are nondiscretionary in nature (e.g., police and fire protection, operation of the courts, etc.), it may be more effective to concentrate on a few major programs each year, being sure to review every program at least once in every few years. Difficulty: 2 Medium Topic: Budgeting approaches Learning Objective: 12-02 Explain the differences among various budgeting approaches. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

56) Explain what is required to develop an effective total quality management (TQM) program for a government. Answer: Although individual governments have tailored their TQM efforts to meet their specific needs, Chapter 12 lists several elements that appear to be common in nearly all TQM structures. In general these elements relate to the need for top-level support and commitment, a strong customer orientation, and multi-faceted approach to enhancing productivity and quality. Productivity and quality are enhanced by reducing organizational barriers, empowering employees to change methods and procedures as needed, training employees in the new methods and procedures, and developing appropriate standards and performance measures. Difficulty: 2 Medium Topic: Managerial tools to improve performance Learning Objective: 12-05 Describe managerial tools used to improve performance. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 57) Under federal guidelines, when is a cost considered reasonable? Answer: A cost is defined as reasonable if, in its nature and amount, it "does not exceed that which would be incurred by a prudent person under the circumstances prevailing at the time the decision was made to incur the cost." Since the reasonableness of certain items of costs may be difficult to determine, nonfederal entities may seek the prior written approval of the federal awarding agency in advance of the incurrence of special or unusual costs. Difficulty: 2 Medium Topic: Budget and cost issues in grant accounting Learning Objective: 12-06 Describe the budget and cost issues in grant accounting. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

58) Describe what is meant by the direct costs of a program (for example, a fire prevention program) and why it is important to distinguish direct costs from indirect costs. Answer: The direct costs of a program are those that can be identified as having been incurred specifically for the purposes of the program. It is important to carefully distinguish direct costs since a government can usually recover the full amount of direct costs of a program that receives federal funding, but only if the costs are identified in the manner set forth in the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards. Indirect costs may only be partially recoverable. Also, knowing the cost of providing fire protection can be highly useful in determining whether to contract with a private firm for fire protection, as have some innovative municipalities. Difficulty: 2 Medium Topic: Budget and cost issues in grant accounting Learning Objective: 12-06 Describe the budget and cost issues in grant accounting. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 59) Identify and define the three broad categories of service efforts and accomplishments (SEA) measures. Answer: Service efforts and accomplishments (SEA) measures include: (1) input measures—measures of service efforts, (2) output and outcome measures—measures of service accomplishments, and (3) efficiency measures—measures that relate efforts to accomplishments. Difficulty: 1 Easy Topic: Service efforts and accomplishments Learning Objective: 12-04 Describe methods of integrating planning, budgeting, performance measurement, and performance reporting. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

60) The finance officer of a small city has heard that certain items of cost may be allowable under federal grants, even though they were not incurred specifically for the grant. To what source could the finance officer go to determine what costs are allowable under federal grants? Why do you think the federal government specifies the allowability of costs? Answer: The OMB's Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, provides guidance to state and local governments on cost principles for federal grants. Also referred to as the "super circular," this document lists allowable and unallowable costs for federal grants and contracts. For example, governments will find that depreciation on equipment used on the grant is an allowable cost, alcoholic beverages are an unallowable cost, and advertising may be an allowable cost under certain restricted conditions. Federal agencies that have a number of grant programs, or large amounts of money to grant, also may publish guidelines for grantee use. Since federal grants are awarded for specific purposes and funded with public resources, it is important that the use of the resources be controlled. As discussed in Chapter 11, federal grants are monitored via single audits. Difficulty: 2 Medium Topic: Budget and cost issues in grant accounting Learning Objective: 12-06 Describe the budget and cost issues in grant accounting. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

Accounting for Governmental and Nonprofit Entities, 18e (Reck) Chapter 13 Not-for-Profit Organizations—Regulatory, Taxation, and Performance Issues 1) A state has the obligation to monitor and regulate a not-for-profit (NFP) organization because it granted the NFP tax-exempt status through the not-for-profit corporation laws. Answer: FALSE Difficulty: 1 Easy Topic: State regulation Learning Objective: 13-02 Describe how and why states regulate NFPs and describe the following: Not-for-profit incorporation laws; Registration, licenses, and tax exemption. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal 2) The federal government's primary objective in regulating not-for-profit organizations through the income tax laws is to limit the number of exempt organizations that operate at any one point in time. Answer: FALSE Difficulty: 1 Easy Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal 3) Not-for-profit corporations cannot lobby or attempt to influence legislation or politicians. Answer: FALSE Difficulty: 1 Easy Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal

4) The not-for-profit organization applying for tax-exempt status determines the appropriate subsection under IRC Sec. 501 for which it wants to be considered and the Internal Revenue Service then approves or denies the application. Answer: TRUE Difficulty: 1 Easy Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal 5) The unrelated business income tax could be a significant cost and therefore should be of concern to tax-exempt organizations. Answer: TRUE Difficulty: 1 Easy Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal 6) Intermediate sanctions can be imposed by the Internal Revenue Service, in addition to revoking the tax-exempt status for organizations that confer excessive economic benefits on officers of the organization. Answer: TRUE Difficulty: 1 Easy Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal

7) If a tax-exempt organization dissolves and goes out of business, it must distribute its assets to another tax-exempt organization or a governmental entity. Answer: TRUE Difficulty: 1 Easy Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal 8) Board members of a not-for-profit organization have a fiduciary responsibility to provide fiscal guidance and ongoing governance over the not-for-profit organization to ensure that its exempt mission is carried out as described in the incorporating documents and exempt application. Answer: TRUE Difficulty: 1 Easy Topic: Governance Learning Objective: 13-04 Describe governance issues of NFP boards, including incorporating documents and board membership. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal 9) All officers of a not-for-profit organization have the same responsibilities to the organization and its constituents. Answer: FALSE Difficulty: 1 Easy Topic: Governance Learning Objective: 13-04 Describe governance issues of NFP boards, including incorporating documents and board membership. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal

10) Not-for-profit organizations are so diverse in nature that it is not feasible to find benchmarks with which to compare their financial and operating performance. Answer: FALSE Difficulty: 1 Easy Topic: Benchmarking and performance measures Learning Objective: 13-05 Identify how benchmarks and performance measures can be used to evaluate NFPs. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Measurement 11) Not-for-profit organizations risk loss of their tax-exempt status if they participate in a political campaign on behalf of a candidate for public office. Answer: TRUE Difficulty: 1 Easy Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal 12) "Excess benefit transactions" are those in which persons who have substantial influence over the not-for-profit organization engage in transactions that result in economic benefits to them that are excessive, such as unreasonable compensation, sale of assets at bargain prices, and lease arrangements. Answer: TRUE Difficulty: 1 Easy Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal

13) One of the limitations of financial ratio analysis for not-for-profit organizations is that donors may incorrectly assume that there are federal or state laws that govern the percentage of annual revenues that a charity must spend on its programs. Answer: TRUE Difficulty: 2 Medium Topic: Benchmarking and performance measures Learning Objective: 13-05 Identify how benchmarks and performance measures can be used to evaluate NFPs. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Measurement 14) The ratio unrestricted net assets as a percent of operating expenses is helpful in determining if the not-for-profit organization can cover its debt service expense. Answer: FALSE Difficulty: 1 Easy Topic: Benchmarking and performance measures Learning Objective: 13-05 Identify how benchmarks and performance measures can be used to evaluate NFPs. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Measurement 15) A 501(c)(3) organization must provide donors with a written disclosure of the amount of the donation if the donation is $1,000 or more. Answer: FALSE Difficulty: 1 Easy Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal

16) Only 501(c)(3) organizations receiving at least 50 percent of their support from the public at large rather than a few individual donors can be considered public charities. Answer: FALSE Difficulty: 1 Easy Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal 17) Political parties and campaign committees can qualify for tax-exempt status. Answer: TRUE Difficulty: 1 Easy Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal 18) All not-for-profit organizations are required to file some type of Form 990 with the Internal Revenue Service. Answer: FALSE Difficulty: 1 Easy Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal

19) Unrelated business income tax is reported on the Form 990. Answer: FALSE Difficulty: 1 Easy Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal 20) The Charleston Principles provide guidance to state governments in setting registration requirements for not-for-profits wanting to raise funds over the Internet. Answer: TRUE Difficulty: 1 Easy Topic: State regulation Learning Objective: 13-02 Describe how and why states regulate NFPs and describe the following: Not-for-profit incorporation laws; Registration, licenses, and tax exemption. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal 21) A not-for-profit typically has gross receipts of $4,500 or less each year. According to the IRS it would not have to file with the IRS to be considered tax-exempt under Sec. 501(c)(3). Answer: TRUE Difficulty: 1 Easy Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal

22) A large not-for-profit organization expended $1,250,000 in direct lobbying during the current year. As long as the $1,250,000 did not exceed 2 percent of the organization's gross receipts, the amount is allowable according to the Internal Revenue Code. Answer: FALSE Difficulty: 2 Medium Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Legal 23) Income, a not-for-profit organization, earns from a rental property on which it has a mortgage is subject to unrelated business income tax. Answer: TRUE Difficulty: 2 Medium Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Legal 24) A disqualified person is a person who has violated and been sanctioned under the Internal Revenue Code. Answer: FALSE Difficulty: 1 Easy Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal

25) A program effectiveness ratio is helpful in assessing whether a not-for-profit is using its resources to accomplish its mission or goals. Answer: TRUE Difficulty: 1 Easy Topic: Benchmarking and performance measures Learning Objective: 13-05 Identify how benchmarks and performance measures can be used to evaluate NFPs. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Measurement 26) The lack of defined ownership for not-for-profit organizations creates control and reporting problems for not-for-profit managers. Answer: TRUE Difficulty: 1 Easy Topic: Defining the not-for-profit sector Learning Objective: 13-01 Distinguish not-for-profit organizations (NFPs) from entities in the governmental and commercial sectors of the U.S. economy. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal 27) The success of a not-for-profit organization is measured primarily by the amount of profits generated by the organization's activities. Answer: FALSE Difficulty: 1 Easy Topic: Defining the not-for-profit sector Learning Objective: 13-01 Distinguish not-for-profit organizations (NFPs) from entities in the governmental and commercial sectors of the U.S. economy. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal 28) Not-for-profit organizations are required to file audited financial statements with all states in which they solicit contributions. Answer: FALSE Difficulty: 1 Easy Topic: State regulation Learning Objective: 13-02 Describe how and why states regulate NFPs and describe the following: Not-for-profit incorporation laws; Registration, licenses, and tax exemption. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal 9

29) Which of the following is not a true statement about tax-exempt organizations? A) They must be organized to serve the charitable needs of the public at large. B) They must first become a not-for-profit corporation or charitable trust. C) They are permitted to do some political lobbying if guidelines are met. D) Their unrelated business income is taxed at corporate income tax rates. Answer: A Difficulty: 1 Easy Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal 30) A nongovernmental tax-exempt organization must complete a Form 990 and send it to the Internal Revenue Service: A) Only if they have unrelated business income. B) If they are not a religious organization, and have gross receipts of $5,000 or more each year. C) If they have gross receipts of $1,000 or more each year. D) Only if they are a private foundation, not a public charity. Answer: B Difficulty: 2 Medium Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Legal

31) Which of the following not-for-profit organizations is most likely to be tax-exempt under IRC Sec. 501(c)(3)? A) Beta Kappa Alpha Sorority. B) Peaceful Dreams Cemetery Association. C) Regional Association of Tree Trimmers. D) Survivors of Breast Cancer Club. Answer: D Difficulty: 2 Medium Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Legal 32) Which of the following is a reason why a not-for-profit organization might fail to qualify for tax-exempt status? A) It is operated primarily for the benefit of its members. B) Its officers are paid excessive wages. C) Its primary purpose is to promote the election of a senate candidate. D) It has unrelated business income. Answer: C Difficulty: 2 Medium Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Legal

33) The Internal Revenue Service may impose intermediate sanctions on all of the following transactions between a not-for-profit organization and its executive officer except: A) Excessive compensation. B) More than the fair rental value for property owned by the officer. C) A bargain on the sale of assets. D) Fringe benefits comparable to those given to all employees. Answer: D Difficulty: 1 Easy Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal 34) The income most likely to be considered unrelated business income of a human service organization that provides immunizations to children in the community is: A) Rental of extra space in the building. B) Regular sale of sweatshirts with the organization's logo on it at a price considerably above cost. C) Interest and dividend income on investments. D) Gain on the sale of equipment no longer needed by the organization. Answer: B Difficulty: 2 Medium Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Legal

35) The term that means information skewed toward a particular belief with a tendency to have little or no factual basis is: A) Political influence. B) Legislation. C) Propaganda. D) Lobbying. Answer: C Difficulty: 1 Easy Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal 36) A tax-exempt organization that receives its support primarily from a large number of individuals or corporations and a relatively small amount from investment income is called a: A) Public charity. B) Private foundation. C) Public foundation. D) Voluntary health and welfare organization. Answer: A Difficulty: 1 Easy Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal

37) Public disclosure rules require that a tax-exempt not-for-profit organization: A) Make available a copy of its Form 990 to the public for a period of up to three years. B) Post a copy of its articles of incorporation and by-laws on its website. C) Provide a copy of the minutes to all board meetings to any person who requests the minutes within 90 days of the board meeting. D) Make available a copy of its Form 990-T, but not its Form 990, to the public for a period of up to two years. Answer: A Difficulty: 1 Easy Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal 38) The organization Shelter the Needy is completing its Form 990 and it is trying to determine if it has unrelated business income on which it must pay taxes. Which of the following would be subject to unrelated business income taxes? A) The Shelter sold art work it had received as a donation. B) Volunteers raised several thousand dollars in a marathon sponsored for the benefit of the Shelter. C) The Shelter earned revenues from the self-service laundry facilities it provides for the benefit of tenants of its low-income temporary housing facilities. D) None of the items listed would be subject to unrelated business income taxes. Answer: D Difficulty: 2 Medium Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Legal

39) A good measure that can be used to help assess whether a not-for-profit organization is spending too much on overhead, such as general and administrative expenses, is: A) Percentage of unrestricted net assets to operating expenses. B) Current ratio. C) Total revenues divided by total expenses. D) Percentage of program expenses to total expenses. Answer: D Difficulty: 1 Easy Topic: Benchmarking and performance measures Learning Objective: 13-05 Identify how benchmarks and performance measures can be used to evaluate NFPs. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Measurement 40) A good measure of whether a not-for-profit organization is a "going concern" and can sustain its operations into the future is: A) Total revenues divided by assets. B) Percentage of unrestricted net assets to operating expenses. C) Percentage of program expenses to total expenses. D) Fund-raising expenses as a percentage of public support. Answer: B Difficulty: 1 Easy Topic: Benchmarking and performance measures Learning Objective: 13-05 Identify how benchmarks and performance measures can be used to evaluate NFPs. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Measurement 41) A good measure of whether a not-for-profit organization is "liquid" and can meet its short-term obligations is: A) Percentage of program expenses to total expenses. B) Total revenues divided by total expenses. C) Current assets divided by current liabilities. D) Percentage of unrestricted net assets to operating expenses. Answer: C Difficulty: 1 Easy Topic: Benchmarking and performance measures Learning Objective: 13-05 Identify how benchmarks and performance measures can be used to evaluate NFPs. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Measurement 15

42) A good measure of whether a not-for-profit organization is efficient in its fund-raising efforts is: A) Fund-raising expenses as a percentage of public support. B) The ratio of program expenses to number of clients served. C) Total revenues divided by total expenses. D) Percentage of program expenses to total expenses. Answer: A Difficulty: 1 Easy Topic: Benchmarking and performance measures Learning Objective: 13-05 Identify how benchmarks and performance measures can be used to evaluate NFPs. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Measurement 43) All of the following organizations may be not-for-profit except: A) Colleges and universities. B) Hospitals. C) Privately held partnerships. D) Human service organizations. Answer: C Difficulty: 1 Easy Topic: Defining the not-for-profit sector Learning Objective: 13-01 Distinguish not-for-profit organizations (NFPs) from entities in the governmental and commercial sectors of the U.S. economy. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal 44) A good measure of whether a not-for-profit organization is operating its programs efficiently is: A) Fund-raising expenses as a percentage of public support. B) The ratio of program expenses to number of clients served. C) Total revenues divided by total expenses. D) Percentage of program expenses to total expenses. Answer: B Difficulty: 1 Easy Topic: Benchmarking and performance measures Learning Objective: 13-05 Identify how benchmarks and performance measures can be used to evaluate NFPs. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Measurement 16

45) The local Kennel Club is a not-for-profit organization with gross receipts of $23,500 for the current tax year. Under the Internal Revenue Service Code, the Kennel Club would be required to file which of the following forms for the tax year? A) Form 990-N. B) Form 990-EZ. C) Form 990-PF. D) Since its gross receipts are less than $25,000 it need not file with the Internal Revenue Service. Answer: A Difficulty: 2 Medium Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Legal 46) The Form 990 consists of 12 parts (core form) and several schedules. Which of the following would not be included as one of the parts of the core form of the Form 990? A) Statement of program service accomplishments. B) Management analysis of the financial condition of the organization. C) Balance sheet. D) A checklist of required schedules. Answer: B Difficulty: 1 Easy Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal

47) Which of the following is the incorporating document of a not-for-profit organization that describes the purpose or mission of the organization? A) By-laws. B) IRS Form 1023 request for tax-exempt status. C) Articles of incorporation. D) Charter. Answer: C Difficulty: 1 Easy Topic: Governance Learning Objective: 13-04 Describe governance issues of NFP boards, including incorporating documents and board membership. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal 48) A not-for-profit organization is granted its legal status by which of the following? A) Federal government. B) State government. C) The city or county in which it resides. D) The courts. Answer: B Difficulty: 1 Easy Topic: State regulation Learning Objective: 13-02 Describe how and why states regulate NFPs and describe the following: Not-for-profit incorporation laws; Registration, licenses, and tax exemption. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal 49) Which of the following would not be required under not-for-profit incorporation laws? A) Appointment of a board of directors. B) Establishment of by-laws. C) A clearly stated purpose for the organization. D) Application for 501(c)(3) status. Answer: D Difficulty: 1 Easy Topic: State regulation Learning Objective: 13-02 Describe how and why states regulate NFPs and describe the following: Not-for-profit incorporation laws; Registration, licenses, and tax exemption. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal

50) Which of the following defines an appeal to the public to take action on a legislative matter? A) Grass-roots lobbying. B) Propaganda. C) Lobbying. D) Political influence. Answer: A Difficulty: 1 Easy Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal 51) Not-for-profit organizations can take which of the following organizational forms? A) Nongovernmental. B) Governmental. C) Business. D) Both governmental and nongovernmental are acceptable organizational forms. Answer: D Difficulty: 1 Easy Topic: Defining the not-for-profit sector Learning Objective: 13-01 Distinguish not-for-profit organizations (NFPs) from entities in the governmental and commercial sectors of the U.S. economy. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal

52) An individual can generally receive a tax deduction for contributions to which type of not-for-profit organization? A) 501(c)(1) organization. B) 501(c)(3) organization. C) 527 organization. D) Any not-for-profit organization granted tax exemption by the IRS. Answer: B Difficulty: 1 Easy Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal; FN Measurement

53) For each of the following definitions, select the key term from the list that best matches by placing the appropriate terms. A. Unrelated business income B. Public charity C. Charitable solicitation D. Lobbying E. Debt financed income F. Private foundation G. Propaganda 1. A not-for-profit exempt under IRC Sec. 501(c)(3) that receives most of its support from a small number of donors or investment income than it does from the public at large. 2. A direct request for credit or financial assistance that will be used for the 501(c)(3)'s mission. 3. Information that is skewed toward a particular belief with little basis in fact. 4. Gross income from a trade or business regularly carried on by a tax-exempt organization. 5. Contacting elected officials to encourage specific legislative action. Answer: 1. F, 2. C, 3. G, 4. A, 5. D Explanation: No further explanation details are available for this problem. Difficulty: 1 Easy Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal

54) For each of the following performance indicators, select the type of ratio from the list that best matches by placing the appropriate ratios. A. Liquidity B. Going concern C. Capital structure D. Program effectiveness E. Efficiency F. Leverage and debt coverage G. Fund-raising ratio H. Fund-raising efficiency I. Investment performance 1. Are earnings on investments on target? 2. What percentage of contributions remains after deducting the cost of raising the contributions? 3. Does the organization rely more on debt or net assets to finance its operations? 4. Is an appropriate amount spent on accomplishing the organization’s program goals? 5. Are revenues sufficient to cover expenses? Answer: 1. I, 2. G, 3. C, 4. D, 5. B Explanation: No further explanation details are available for this problem. Difficulty: 1 Easy Topic: Benchmarking and performance measures Learning Objective: 13-05 Identify how benchmarks and performance measures can be used to evaluate NFPs. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Measurement

55) Describe the process for becoming a tax-exempt organization. Why do you believe it is important for an accountant to understand this process? Answer: A group of people with similar interests form a not-for-profit corporation (or charitable trust) with a state to establish a legal identity separate from the incorporators. An application for exemption from federal income tax is then made to the Internal Revenue Service under one of the tax-exempt code sections, e.g., IRC Sec. 501(c)(3). The appropriate code section will depend on the mission of the organization and whether the public at large is served or the mutual benefits of the organization's members. An accountant working with a tax-exempt organization (or its auditor) must understand to whom the entity is accountable and comply with all laws and regulations relating to the organization and its operations. The accountant can also be helpful in filing proper reports with the appropriate agencies. Very often accountants are asked to serve as treasurers of the board, and, in this position, bear the responsibility for financial accountability as defined in the by-laws of the not-for-profit corporation. Difficulty: 2 Medium Topic: Federal regulation; State regulation Learning Objective: 13-02 Describe how and why states regulate NFPs and describe the following: Not-for-profit incorporation laws; Registration, licenses, and tax exemption.; 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Understand AACSB: Communication AICPA: BB Legal

56) Why do states and the federal government exercise oversight responsibility over not-for-profit, tax-exempt corporations? How do states and the federal government differ in the way they exercise this responsibility? Answer: States have oversight responsibility over organizations that have incorporated in their state under the not-for-profit incorporation laws or as charitable trusts. Congress gave the Internal Revenue Service power to regulate organizations that have applied for and been granted exemption from federal corporate taxes. In both cases, the government is protecting the public good by monitoring that the not-for-profit, tax-exempt organization is operating for the purpose for which it was intended. States can regulate not-for-profit corporations by requiring audited annual financial statements, requiring registration, requiring licenses to solicit funds, requiring the not-for-profit do business in the state, and/or regulate the lobbying done by not-for-profits. Often fees accompany registration and licenses to defray the cost of regulation and monitoring. Although rules differ across the 50 states, there are generally rules and regulations that require reporting on lobbying and political influencing. The federal government requires that the tax-exempt organization file an annual Form 990 with the Internal Revenue Service, which is a very detailed report describing the financial position, results of operations, and other nonfinancial information about the organization. Difficulty: 2 Medium Topic: Federal regulation; State regulation Learning Objective: 13-02 Describe how and why states regulate NFPs and describe the following: Not-for-profit incorporation laws; Registration, licenses, and tax exemption.; 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Understand AACSB: Communication AICPA: BB Legal

57) Your client is a nongovernmental not-for-profit museum that operates a gift shop. Explain the unrelated business income tax to your client and suggest ways to avoid this tax. Answer: The unrelated business income tax (UBIT) is a tax assessed on the profits from activities engaged in by a tax-exempt organization that are outside of the tax-exempt purpose identified in the organization's application for exemption from income tax. One of the objectives of the UBIT is to prevent not-for-profit corporations from competing with businesses unfairly (because they are relieved of the cost of paying income tax). The first $1,000 of unrelated income escapes tax, but income over that amount is taxed at the corporate tax rate. Unrelated business income is income from a substantially unrelated trade or business regularly conducted (less directly connected expenses). A museum that sells items directly related to the exhibits may not be subject to UBIT. At issue is how the income was earned, and not how it was used, even if it is used to further the organization's exempt purpose. Difficulty: 2 Medium Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Understand AACSB: Communication AICPA: BB Legal 58) Explain the purpose of "intermediate sanctions." Answer: Intermediate sanctions exist to allow the Internal Revenue Service (IRS) to assess penalties on a not-for-profit organization when a transaction confers a substantial benefit on a disqualified person. A disqualified person is one who has substantial influence over the organization's affairs. Examples of excess benefit transactions include unreasonable compensation, sales of assets at bargain prices, and lease arrangements. Intermediate sanctions allow the IRS to penalize the organization and the disqualified party who received the benefits rather than revoking the not-for-profit's tax-exempt status (its other option). Difficulty: 2 Medium Topic: Federal regulation Learning Objective: 13-03 Identify how the federal government regulates NFPs and describe the following: Tax-exempt status-public charities and private foundations; Unrelated business income tax; Restrictions on political activity; Excessive benefits received by officers; Reorganization and dissolution. Bloom's: Understand AACSB: Communication AICPA: BB Legal

59) Describe the difficulty in comparing the financial performance of a not-for-profit organization to other similar organizations. What benchmarks are available to assist in this task? Answer: Each not-for-profit organization is likely to think they are unlike any other, making comparisons difficult, and, although Form 990s are readily available, audited financial statements are not. A classification scheme, such as the National Taxonomy of Exempt Entities, helps to categorize tax-exempt organizations as to their mission so that comparisons can more easily be made. Watchdog agencies, such as Charity Navigator and the BBB Wise Giving Alliance, are increasingly better at rating charities using comparisons with similar not-for-profit organizations and more standardized performance indicators and ratios. Difficulty: 2 Medium Topic: Benchmarking and performance measures Learning Objective: 13-05 Identify how benchmarks and performance measures can be used to evaluate NFPs. Bloom's: Understand AACSB: Communication AICPA: FN Measurement

Accounting for Governmental and Nonprofit Entities, 18e (Reck) Chapter 14 Accounting for Not-for-Profit Organizations 1) Under current accounting and reporting standards, nongovernmental not-for-profit organizations must utilize the fund accounting structure set forth in the AICPA Audit and Accounting Guide Not-for-Profit Entities. Answer: FALSE Difficulty: 1 Easy Topic: GAAP for nongovernmental NFP organizations Learning Objective: 14-01 Identify the authoritative standards-setting body for establishing GAAP for nongovernmental not-for-profit organizations (NFPs), and determine whether a NFP organization is governmental. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 2) Examples of organizations that can be either governmental or nongovernmental include colleges and universities, hospitals, and museums. Answer: TRUE Difficulty: 1 Easy Topic: Determining whether an NFP organization is a government Learning Objective: 14-01 Identify the authoritative standards-setting body for establishing GAAP for nongovernmental not-for-profit organizations (NFPs), and determine whether a NFP organization is governmental. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 3) The FASB generally requires that not-for-profit organizations record unconditional pledges as support (contributions) only when received in cash. Answer: FALSE Difficulty: 1 Easy Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

4) Cash received by a nongovernmental not-for-profit organization in year 1 that the donor stipulates is to cover operating expenses of the following year should be recognized as an increase in net assets with donor restrictions in year 1 and as net assets released from restrictions in year 2. Answer: TRUE Difficulty: 2 Medium Topic: Statement of financial position Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 5) The FASB states that donated services should be recorded as contributions by a not-for-profit organization if they meet the recognition criteria and are material. Answer: TRUE Difficulty: 1 Easy Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 6) The FASB requires that support from special events, if related to the central ongoing and major activities of the organization, and related direct costs, be reported at their gross amounts in the statement of activities. Answer: TRUE Difficulty: 1 Easy Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

7) GAAP for nongovernmental not-for-profit organizations is set by the FASB and the AICPA. Answer: FALSE Difficulty: 1 Easy Topic: GAAP for nongovernmental NFP organizations Learning Objective: 14-01 Identify the authoritative standards-setting body for establishing GAAP for nongovernmental not-for-profit organizations (NFPs), and determine whether a NFP organization is governmental. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 8) Supporting services expenses include fund-raising and management and general expenses that are not directly attributable to specific programs. Answer: TRUE Difficulty: 1 Easy Topic: Accounting for expenses Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 9) Contributions received in a prior period and restricted by the donor for construction of a building were reported as increases to net assets with donor restrictions in the period received. When the building is constructed in a subsequent period a not-for-profit would report contributions for the amount released from restrictions. Answer: FALSE Difficulty: 2 Medium Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

10) Under FASB standards the statement of activities for a not-for-profit organization is required to be separated into operating and nonoperating activity. Answer: FALSE Difficulty: 1 Easy Topic: Statement of Activities Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 11) Not-for-profits are required to report expense amounts by natural classification and functional classification. Answer: TRUE Difficulty: 1 Easy Topic: Reporting of expenses by nature and function Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 12) The FASB requires not-for-profits to prepare a statement of cash flows.

Answer: TRUE Difficulty: 1 Easy Topic: Statement of Cash Flows Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

13) Similarity in the characteristics of nongovernmental not-for-profit (NFP) organizations and governmental NFP organizations can make it difficult to determine whether the NFP is nongovernmental or governmental in nature. Answer: TRUE Difficulty: 1 Easy Topic: Determining whether an NFP organization is a government Learning Objective: 14-01 Identify the authoritative standards-setting body for establishing GAAP for nongovernmental not-for-profit organizations (NFPs), and determine whether a NFP organization is governmental. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 14) The FASB requires not-for-profit organizations to report expenses by nature and function in the notes to the financial statements. Answer: FALSE Difficulty: 1 Easy Topic: Reporting of expenses by nature and function Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 15) Board-designated net assets are net assets with donor restrictions the board sets aide for a specific purpose. Answer: FALSE Difficulty: 1 Easy Topic: Statement of financial position Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry

16) According to the FASB Codification, donated materials are generally not recognized as contributions by a not-for-profit organization. Answer: FALSE Difficulty: 1 Easy Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 17) Donor-imposed restrictions must be clearly reflected in financial statements of not-for-profit organizations reporting under the FASB. Answer: TRUE Difficulty: 1 Easy Topic: Statement of financial position Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 18) The FASB requires that the purchase of equity securities be initially recorded at the acquisition price and the purchase of debt securities be initially recorded at fair value. Answer: FALSE Difficulty: 1 Easy Topic: Accounting for assets Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

19) Museums and religious organizations reporting in accordance with FASB must capitalize and report assets such as works of art, historical treasures, and similar collectible items if they are held for public inspection. Answer: FALSE Difficulty: 1 Easy Topic: Accounting for assets Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 20) Under FASB standards, expenses of a not-for-profit organization can only be shown as reductions of net assets without donor restrictions. Answer: TRUE Difficulty: 1 Easy Topic: Statement of Activities Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 21) The FASB requires the statement of financial position prepared by a not-for-profit organization to report net assets in three categories: net assets without donor restrictions, net investment in capital assets, and net assets with donor restrictions. Answer: FALSE Difficulty: 1 Easy Topic: Statement of financial position Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

22) Organizations that have the power to enact and enforce a tax levy are nongovernmental not-for-profits. Answer: FALSE Difficulty: 1 Easy Topic: Determining whether an NFP organization is a government Learning Objective: 14-01 Identify the authoritative standards-setting body for establishing GAAP for nongovernmental not-for-profit organizations (NFPs), and determine whether a NFP organization is governmental. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 23) The GASB provides guidance on generally accepted accounting principles for governmental not-for-profit organizations. Answer: TRUE Difficulty: 1 Easy Topic: GAAP for nongovernmental NFP organizations Learning Objective: 14-01 Identify the authoritative standards-setting body for establishing GAAP for nongovernmental not-for-profit organizations (NFPs), and determine whether a NFP organization is governmental. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 24) An organization that can directly issue debt paying interest exempt from federal taxation may be a governmental not-for-profit or a nongovernmental not-for-profit. Answer: TRUE Difficulty: 1 Easy Topic: Determining whether an NFP organization is a government Learning Objective: 14-01 Identify the authoritative standards-setting body for establishing GAAP for nongovernmental not-for-profit organizations (NFPs), and determine whether a NFP organization is governmental. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry

25) Under the FASB Codification a $5 million endowment that cannot be spent for 50 years should be classified as net assets with donor restrictions. Answer: TRUE Difficulty: 1 Easy Topic: Statement of financial position Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 26) Fixed-term endowments and board-designated endowments are classified as net assets with donor restrictions according to the FASB. Answer: FALSE Difficulty: 1 Easy Topic: Statement of financial position Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 27) Similar to the GASB, the FASB requires not-for-profit entities to prepare the statement of cash flows using the direct method. Answer: FALSE Difficulty: 1 Easy Topic: Statement of Cash Flows Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 28) Long-term unconditional pledges (those that will not be collected within a year) are generally reported at fair value. Answer: TRUE Difficulty: 1 Easy Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 9

29) The FASB requires that if a financial intermediary has variance power it recognize a donation as a contribution payable on its financial statements. Answer: FALSE Difficulty: 1 Easy Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 30) Under the FASB Codification the costs incurred for a joint activity may be allocated between fund-raising expenses and program expenses if the criteria of purpose, audience, and content are met. Answer: TRUE Difficulty: 1 Easy Topic: Accounting for expenses Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 31) The FASB states that if a not-for-profit has a controlling financial interest in a for-profit it should consolidate the for-profit over which it has a controlling financial interest into its financial statements. Answer: TRUE Difficulty: 1 Easy Topic: Consolidations Learning Objective: 14-04 Explain accounting for NFP consolidations and combinations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

32) Goodwill created because a not-for-profit organization obtains control of another organization is always recorded as an asset. Answer: FALSE Difficulty: 1 Easy Topic: Consolidations Learning Objective: 14-04 Explain accounting for NFP consolidations and combinations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 33) Which of the following characteristics of not-for-profit organizations (NFPs) can be used to distinguish a nongovernmental from a governmental NFP? A) Contributions by resource providers who do not expect a return on investment. B) Ability to impose taxes on citizens. C) Absence of ownership interests. D) All of the given characteristics are generally different for nongovernmental versus governmental NFPs. Answer: B Difficulty: 1 Easy Topic: Determining whether an NFP organization is a government Learning Objective: 14-01 Identify the authoritative standards-setting body for establishing GAAP for nongovernmental not-for-profit organizations (NFPs), and determine whether a NFP organization is governmental. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 34) Responsibility for establishing generally accepted accounting principles (GAAP) for nongovernmental, not-for-profit organizations rests with the FASB and was most clearly established: A) By the FASB Codification. B) When the FASB was created in 1974. C) When the GASB was created in 1984. D) In the AICPA's Statement of Auditing Standards No. 69 (hierarchy of GAAP). Answer: A Difficulty: 1 Easy Topic: GAAP for nongovernmental NFP organizations Learning Objective: 14-01 Identify the authoritative standards-setting body for establishing GAAP for nongovernmental not-for-profit organizations (NFPs), and determine whether a NFP organization is governmental. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 11

35) Under FASB standards how would a not-for-profit organization recognize a conditional pledge? A) Debit Pledges Receivable and credit Contributions—With Donor Restrictions. B) Debit Pledges Receivable and credit Deferred Contributions. C) Debit Conditional Pledges Receivable and Credit Deferred Contributions. D) It would not recognize the conditional pledge until pledge conditions are substantially met. Answer: D Difficulty: 2 Medium Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 36) The FASB Codification requires the following financial statements for all not-for-profit organizations: A) Statement of financial position, statement of activities, and statement of cash flows. B) Statement of financial position, statement of operations, and statement of cash flows. C) Statement of financial position, statement of activities, and statement of net assets. D) Statement of financial position, statement of revenues and expenses, and statement of cash flows. Answer: A Difficulty: 1 Easy Topic: Financial Reporting Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

37) Which of the following statements is true regarding fund accounting for not-for-profit organizations (NFPs)? A) Fund accounting can be used by NFPs for external purposes, but not internal purposes. B) Fund accounting can provide a good mechanism for facilitating reporting to donors. C) Fund accounting is not allowed. D) Fund accounting for internal and external reporting purposes has been replaced by FASB with the two classes of net assets (without donor restrictions, and net investment in restricted assets). Answer: B Difficulty: 2 Medium Topic: Financial Reporting Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 38) According to the FASB Codification, which of the following is a condition that must be met for contributed services to a not-for-profit organization (NFP) to be recorded as both a contribution and as an expense? A) The service creates or enhances nonfinancial assets, such as a carpenter renovating a building. B) The service requires a specialized skill and is provided by someone who possesses the specialized skill, such as a lawyer preparing contracts. C) The service supplements the management function, such as an auditor preparing a program audit, which is not normally done. D) All of the given conditions must be met for contributed services to be recognized as a contribution and an expense. Answer: B Difficulty: 2 Medium Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

39) The FASB requires investments in equity securities that have a readily determinable market value of a not-for-profit organization be reported at: A) Lower of cost or market. B) Amortized cost. C) Fair value. D) Cost. Answer: C Difficulty: 1 Easy Topic: Accounting for assets Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 40) An example of an increase in net assets for a not-for-profit organization that would be labeled revenue rather than support is: A) An unconditional promise to give. B) Investment income. C) A restricted gift. D) An allocation of funds from the local United Way organization. Answer: B Difficulty: 2 Medium Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

41) A donor provides a large cash contribution that is to be used for acquisition of a new building. Under FASB standards, how would this contribution be reported by a not-for-profit organization on its statement of cash flows? A) Operating activity. B) Investing activity. C) Financing activity. D) Capital and related financing activity. Answer: C Difficulty: 1 Easy Topic: Statement of Cash Flows Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 42) The FASB states that depreciation expense in a not-for-profit organization should be: A) Assigned to or allocated to the functions to which it relates. B) Reported under the management and general function. C) Disclosed in the notes to the financial statements. D) Allocated to program but not support functions. Answer: A Difficulty: 1 Easy Topic: Accounting for expenses Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

43) A not-for-profit (NFP) organization acting as a financial intermediary receives a contribution. Under the FASB Codification the NFP would be most likely to recognize the contribution as a liability under which of the following situations? A) The NFP has variance power. B) The NFP is acting as an agent, receiving the contribution on behalf of another organization. C) The NFP is financially interrelated with the organization on whose behalf it received the contribution. D) The NFP has a 51 percent interest in the organization on whose behalf it received the contribution. Answer: B Difficulty: 2 Medium Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 44) According to the FASB, net assets with donor restrictions are released from restrictions: A) At the end of each fiscal year. B) As assets are spent for the purposes intended by the donor. C) When funds are returned to the donor. D) When all donor conditions have been met. Answer: B Difficulty: 1 Easy Topic: Statement of financial position Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

45) A local philanthropist made an unconditional pledge to donate $100,000 to a not-for-profit organization to be paid in five equal installments of $20,000 beginning in two years. Under FASB standards the pledge would be recognized as: A) A contribution of $20,000 in each of the five years a contribution is made. B) A contribution of $100,000 in the year the pledge is made, adjusted for the estimated uncollectible amount. C) Deferred support of $100,000 in the year the pledge was made. D) A contribution of $100,000 in the year the pledge was made, discounted for the difference between the pledge and its present value. Answer: D Difficulty: 2 Medium Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 46) Which of the following statements is correct regarding reporting of special events and related direct costs under current FASB standards? A) Special events and related direct costs must be reported separately at their gross amounts if they relate to the ongoing major operations of a not-for-profit. B) Special events revenues are to be reported at gross amounts, even if direct costs are of a peripheral or incidental nature. C) With few exceptions special events revenues are reported net of related direct costs. D) Expenses of promoting and conducting special events should be netted directly against special events revenue. Answer: A Difficulty: 2 Medium Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

47) A not-for-profit organization incurred $10,000 in management and general expenses in the current fiscal year. When reporting the expenses by function, the $10,000 would be reported as: A) A deduction from program revenue. B) Fund-raising expense. C) Program services expenses. D) Supporting services expenses. Answer: D Difficulty: 1 Easy Topic: Accounting for expenses Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 48) Which of the following would be considered "contribution revenue or support" of a not-for-profit organization under FASB standards? A) Gain on disposal of capital assets. B) Money received from a fund-raising campaign. C) Money received from rental of surplus office space. D) Investment earnings. Answer: B Difficulty: 2 Medium Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

49) In accordance with FASB standards, securities donated to a not-for-profit organization should be recorded at the: A) Donor's recorded amount. B) Fair value at the date of the gift, or the donor's recorded amount, whichever is lower. C) Fair value at the date of the gift, or the donor's recorded amount, whichever is higher. D) Fair value at the date of the gift. Answer: D Difficulty: 1 Easy Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 50) Which of the following would be reported as an Asset with Restrictions on Use? A) A cash contribution for a program activity, such as diabetes research. B) A cash contribution for a new building. C) Cash restricted by debt covenants with lenders. D) Cash restricted by the board for purchase of new computer equipment. Answer: B Difficulty: 2 Medium Topic: Accounting for assets Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

51) Under FASB standards, which of the following contributions would not have to be reported as an asset on the statement of financial position of a not-for-profit organization? A) Land was donated to the Friends of the Forest Society for conversion into a nature trail. B) The original courthouse was donated to the Historical Preservation Society for conversion into a museum. C) An art collector donated a famous oil painting to a local art museum for display in its exhibit hall. D) A valuable coin collection was donated to the Youth for Conservation organization, which the organization plans to sell at current market prices. Answer: C Difficulty: 2 Medium Topic: Accounting for assets Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 52) According to the FASB, a not-for-profit arts organization would report the account Provision for Uncollectible Pledges as which of the following? A) Expense. B) Contra revenue. C) Contra asset. D) FASB allows management to determine its policy for reporting the Provision for Uncollectible Pledges. Answer: A Difficulty: 1 Easy Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

53) A not-for-profit organization that follows FASB standards must display the changes in all classes of net assets on which of the following statements? A) Statement of activities. B) Statement of financial position. C) Statement of cash flows. D) Statement of functional expenses. Answer: A Difficulty: 1 Easy Topic: Statement of Activities Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 54) When a nongovernmental not-for-profit organization spends money for the purpose for which an external donor intended, the expense is reported as a: A) Decrease in net assets with donor restrictions. B) Decrease in net assets without donor restrictions. C) Decrease in current-restricted fund balance. D) Decrease in committed fund balance. Answer: B Difficulty: 1 Easy Topic: Accounting for expenses Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 55) Not-for-profits can report expenses by nature and function: A) In the notes to the financial statements. B) As a separate financial statement. C) In the statement of activities. D) All of the options are correct. Answer: D Difficulty: 1 Easy Topic: Reporting of expenses by nature and function Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 21

56) According to the FASB, how should unrealized gains on the investment portfolio of a not-for-profit organization be recognized? A) Not recognized. B) Reported in the net asset section of the balance sheet. C) Reported according to whether the gains relate to trading, or held-to-maturity assets. D) Reported on the statement of activities. Answer: D Difficulty: 1 Easy Topic: Accounting for assets Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 57) Which of the following is not one of the criteria specified in the FASB Codification for determining whether joint costs with a fund-raising appeal can be reported with program expenses rather than as fund-raising expenses? A) Purpose. B) Audience. C) Time period. D) Content. Answer: C Difficulty: 1 Easy Topic: Accounting for expenses Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

58) Which of the following terms is used to indicate that a donor provided a gift with explicit instructions that the gift is to be used for a specific purpose by the not-for-profit but the entire amount may be spent right away? A) Board-designated net assets. B) Net assets without donor restrictions. C) Endowment assets. D) Net assets with donor restrictions. Answer: D Difficulty: 2 Medium Topic: Statement of financial position Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 59) In the current year, the not-for-profit organization Save the Butterflies Foundation received cash of $500 to be used as the Foundation wishes and $1,000 to be used for butterfly research. Save the Butterflies also received pledges of $700 that it can use as it wishes and $600 for its building fund. All pledges are expected to be received next year. How much would Save the Butterflies report as contributions with donor restrictions in the current year? A) $1,000. B) $1,600. C) $1,300. D) $2,300. Answer: D Difficulty: 3 Hard Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Reporting

60) In the current year, the not-for-profit organization (NFP) How to Read Government Financial Reports received both cash of $1,000 and pledges of $2,000 to be used for teaching citizens how to read government financial reports. During the year the organization spent $1,500 teaching citizens to read financial statements. Assuming the NFP has a policy of spending its restricted resources first, in the current year what amount of contributions can be reclassified as without donor restrictions? A) $1,000. B) $1,500. C) $2,000. D) $3,000. Answer: A Difficulty: 3 Hard Topic: Statement of Activities Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Reporting 61) The mission of the not-for-profit organization, Save Our Butterflies Foundation, is to provide research and education concerning the conservation of butterflies. Which of the following expenses would be reported as a support expense by the Foundation? A) The costs of exhibiting at the local Nature Conservancy annual fair held for the general public. B) The costs of depreciation on it butterfly facility. C) The cost of printed materials distributed to the local elementary schools on how to start butterfly gardens. D) The cost of printing and distributing its annual report. Answer: D Difficulty: 2 Medium Topic: Accounting for expenses Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

62) For financial reasons, two not-for-profit hospice organizations (hospices A and B) decided to combine. As a result of the combination, the assets and liabilities of the combined hospice were reported at the amounts that had been previously reported by A and B on their financial statements. Under the FASB, the combining of hospices A and B would be classified as which of the following? A) Merger. B) Consolidation. C) Acquisition. D) Component unit. Answer: A Difficulty: 2 Medium Topic: Combinations Learning Objective: 14-04 Explain accounting for NFP consolidations and combinations. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 63) During the year a donor pledged $1,000,000 in funds to a not-for-profit private charter school. The school will receive the pledge if it is able to raise $500,000 in funds over the next year. According to the FASB, how would this pledge be recorded? A) Contribution—With Donor Restrictions. B) Contribution—Without Donor Restrictions. C) Deferred Revenue. D) It would not be recorded. Answer: D Difficulty: 2 Medium Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

64) A local CPA volunteered his time to prepare the Form 990 for an after-school development organization that serves disadvantaged children. If the services had not been donated the organization would have had to hire a CPA to prepare the return. In accordance with the FASB Codification, the value of the CPA's time devoted to helping the organization should be recorded as: A) Contribution—With Donor Restrictions. B) Support Expense. C) Machinery & Equipment. D) It would not be recorded. Answer: B Difficulty: 2 Medium Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 65) The board of directors for a nongovernmental not-for-profit organization decided to designate $20,000 each year for the next three years to fund a special research project it was planning to conduct at the end of the three-year period. How would these board-designated resources be reported on the statement of financial position? A) Net assets with donor restrictions. B) Net assets without donor restrictions. C) Internal payable. D) The resources would not be reported on the statement of financial position. Answer: B Difficulty: 2 Medium Topic: Statement of financial position Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

66) How does the FASB require not-for-profit organizations to report expenses? A) Natural classification, such as salaries, rent, and supplies. B) Functional classification, such as program and support. C) Management has the option of reporting using natural classification or functional classification. D) Both natural classification and functional classification must be reported. Answer: D Difficulty: 1 Easy Topic: Accounting for expenses Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 67) In accordance with the FASB Codification, which of the following would not be classified as a support expense by the not-for-profit organization Save Our Lakes? A) The cost of printing and distributing the annual report. B) The cost of a mailing to past contributors requesting donations for lakeshore cleanup. C) The cost of the annual lakeshore cleanup activities. D) The cost to have an attorney review the organization's by-laws. Answer: C Difficulty: 2 Medium Topic: Accounting for expenses Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

68) For each of the following definitions, indicate the key term from the list that best matches by placing the appropriate terms. A. Nonexchange transactions B. Net assets with donor restrictions C. Collections D. Variance power E. Exchange transactions F. Board-designated net assets G. Endowment H. Promise to give 1. Unrestricted net assets that the governing body decides to set aside for specific purposes 2. The unilateral power of an organization to redirect donated assets to a different beneficiary than initially indicated by the donor 3. Net assets for which the donor has indicated use in a future period or for a particular purpose 4. Transactions in which the donor derives no direct tangible benefits 5. Works or art, historical treasures, or similar assets held and protected for public exhibition, and, if sold, proceeds would be used to acquire similar assets Answer: 1. F, 2. D, 3. B, 4. A, 5. C Explanation: No further explanation details are available for this problem. Difficulty: 1 Easy Topic: Financial Reporting; Accounting for NFP organizations Learning Objective: 14-02 Identify and explain financial reporting for NFPs, including required financial statements, and classification of net assets.; 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

69) Record the journal entry that would be made by a nongovernmental, not-for-profit organization involved in medical research. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) 1. The entity received $1,500 in cash contributions. Of that amount, $1,000 is to be used for medical research. 2. The entity received pledges of $700,000 for its endowment fund. All pledges will be collected next year. 3. The entity received donated services of $1,200 from medical researchers who helped with the entity's on-going drug development research. It also received $300 in donated services from students, who helped clean the research facilities. 4. The entity paid medical research operating expenses of $5,000 that were related to restricted net assets it had received in prior years. Answer: 1. Cash Contributions–Without Donor Restrictions Contributions–With Donor Restrictions 2.

Pledges Receivable Contributions–With Donor Restrictions Medical Research Program Expenses Contributions–Without Donor Restrictions

$ 1,500 $ 500 $ 1,000 $700,000 $700,000 $1,200 $1,200

Note the $300 of student donated services is not recorded since the services do not require a specialized skill. 4.

Medical Research Program Expenses Cash Net Assets Released–Satisfaction of Program Restrictions–With Donor Restrictions Net Assets Released–Satisfaction of Program Restrictions–Without Donor Restrictions

$ 5,000 $ 5,000 $ 5,000 $ 5,000

Difficulty: 3 Hard Topic: Accounting for NFP organizations Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Reporting

70) Explain the purpose of FASB ASC 958-720-45 on joint-cost accounting as it relates to reporting fund-raising and program expenses of a not-for-profit organization. How is this standard applied? Answer: The purpose of the standard is to provide guidance on when costs of joint activities that involve fund-raising and a program purpose can be allocated between fund-raising and programs. The FASB requires three criteria to be met before a cost can be reported as a program expense, 1) the purpose must be to advance the mission of the organization, 2) the cost must be directed to an audience who is capable of advancing that mission, and 3) the content of the material that is produced must include a call to action on the part of the audience to advance the mission of the organization. If all three of these criteria are met, the costs identifiable with a specific program function can be reported as a program expense rather than a fund-raising expense. If one of the criteria is not met the costs must be reported as fund-raising, they cannot be allocated. Difficulty: 3 Hard Topic: Accounting for expenses Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Apply AACSB: Communication AICPA: FN Reporting 71) Distinguish not-for-profit organizations from entities in the government and commercial sectors of the U.S. economy. Answer: Not-for-profit organizations that are nongovernmental differ from government entities because they were created by individuals, not governments; they do not have the power to tax citizens; and FASB is the authoritative standards setting body for financial reporting, not the GASB. Nongovernmental, not-for-profit organizations differ from businesses in the commercial sector because they are often the recipient of contributions by donors in nonexchange transactions, rather than exchange transactions for which resource providers expect a proportionate return; they operate for purposes other than to earn a profit and there is an absence of ownership interests. Difficulty: 2 Medium Topic: GAAP for nongovernmental NFP organizations Learning Objective: 14-01 Identify the authoritative standards-setting body for establishing GAAP for nongovernmental not-for-profit organizations (NFPs), and determine whether a NFP organization is governmental. Bloom's: Understand AACSB: Communication AICPA: BB Industry

72) Distinguish between "support" and "revenues from exchange transactions." Answer: Support means revenue from contributions made without expectation of commensurate benefits for the donor, such as gifts, grants, and bequests. Revenues from exchange transactions, on the other hand, arise from bilateral exchange transactions in which the other party to the transaction receives benefit or other consideration for the resources provided. Examples of such revenues are membership dues, program service fees, sales of supplies or services, investment income, and realized gains on investment transactions. Difficulty: 2 Medium Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Communication AICPA: BB Industry 73) If the program services expenses category includes both directly related costs and indirect costs allocated to it, why is it necessary to have a separate category of "supporting services expenses"? Answer: It is desirable to know the full cost of service programs, which is why program services expenses include both the direct costs and allocated indirect costs of programs. However, some expenses are incurred for general purposes, such as to maintain or increase public awareness of the organization rather than for any specific program(s). In addition, costs of general management and administration, such as accounting, budgeting, legal services, etc. are necessary to maintain the organization, and thus are properly chargeable to "supporting services expenses" rather than "program services expenses." Similarly general fund-raising activities usually benefit multiple programs and are not readily allocable to individual programs. Difficulty: 2 Medium Topic: Accounting for expenses Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Communication AICPA: BB Industry

74) Would a not-for-profit library that receives the majority of its resources from a specific tax levy on local citizens remitted to the city follow the same financial reporting principles as would a library that operates without a dedicated tax and instead relies on contributions from individuals and grants from foundations and governments? Explain. Answer: No. The Governmental Accounting Standards Board establishes generally accepted accounting principles (GAAP) for a library that receives tax revenue as that is a governmental, not-for-profit organization. The Financial Accounting Standards Board establishes GAAP for nongovernmental not-for-profit organizations such as the second library described, which depends on contributions and grants and not tax revenue. Difficulty: 2 Medium Topic: GAAP for nongovernmental NFP organizations Learning Objective: 14-01 Identify the authoritative standards-setting body for establishing GAAP for nongovernmental not-for-profit organizations (NFPs), and determine whether a NFP organization is governmental. Bloom's: Understand AACSB: Communication AICPA: BB Industry 75) Explain when donated materials should be recognized as a contribution and as an expense by a nongovernmental not-for-profit organization. Answer: FASB criteria for recognizing revenue for donated materials are somewhat restrictive and limit recognition of donated materials by not-for-profit organizations. In general, donated materials (gifts-in-kind) should be recorded as contributions and as expenses (supplies expense or cost of goods sold) at fair value on the date of the gift if an objective, clearly measurable basis for fair value can be established. Difficulty: 2 Medium Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Communication AICPA: BB Industry

76) Explain the accounting for contributions received by a financial intermediary under the FASB Codification. Answer: If a not-for-profit organization (NFP) merely accepts charitable contributions from donors for the purpose of directing them to another organization, then it is considered an "agent" and the contribution is reported as an increase to cash and a liability to the other organization. In these cases, the NFP does not recognize revenue or expense on the contribution received and then made. On the other hand, if a NFP receives a contribution and the donor gives that NFP "variance power" to redirect the asset to someone else, or if the NFP is financially interrelated with the organization that is intended to receive the gift, then the NFP reports the contribution as an asset and as revenue, and reports an expense when the resources are directed to the intended organization. Difficulty: 2 Medium Topic: Revenues and gains Learning Objective: 14-03 Explain accounting for NFPs, including accounting for revenues, gains, support, expenses, and assets. Bloom's: Understand AACSB: Communication AICPA: FN Reporting

77) The not-for-profit organization Accountants Rule has a mission to promote the accounting profession in the local community. It is heavily supported by local accounting firms and businesses seeking to increase the number of individuals entering the profession. Following is the pre-closing trial balance for the organization.

Cash and cash equivalents Investments Pledges receivable Allowance for uncollectible pledges Accounts payable and accrued liabilities Net assets without donor restrictions Net assets with donor restrictions Contributions—without donor restrictions Contributions—with donor restrictions Interest income—without donor restrictions Net assets released—satisfaction of program restriction—without donor restrictions Net assets released—satisfaction of program restriction—with donor restrictions Outreach expenses College recruitment expenses Management and general expenses Fund-raising expenses Total

$ $ $

Debit 985 2,605 830

Credit

$ $ $ $ $ $ $

35 1,090 1,267 2,148 3,460 1,720 55

1,850

$ 2,800 $ 1,955 $ 425 $ 175 $ 11,625

$ 11,625

Prepare a statement of activities for the organization for the year ended December 31, 2020. (Negative amounts should be indicated by a minus sign.)

Answer:

Explanation: No further explanation details are available for this problem. Difficulty: 3 Hard Topic: Illustrative transactions Not-for-profit organizations Learning Objective: 14-05 Prepare journal entries and financial statements in accordance with the generally accepted accounting principles governing NFP organizations. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Reporting

Accounting for Governmental and Nonprofit Entities, 18e (Reck) Chapter 15 Accounting for Colleges and Universities 1) Nongovernmental (private) colleges and universities should follow FASB standards; governmental (public) colleges and universities should follow GASB standards. Answer: TRUE Difficulty: 1 Easy Topic: Accounting and Financial Reporting Standards Learning Objective: 15-01 Distinguish between generally accepted accounting principles for public and private colleges and universities. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 2) Under GASB standards, public colleges and universities are considered general purpose governments. Answer: FALSE Difficulty: 1 Easy Topic: Public Colleges and Universities Learning Objective: 15-02 Describe financial reporting for public and private colleges and universities. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 3) The accrual basis of accounting is used to record revenues and expenses of both public business-type and private colleges and universities. Answer: TRUE Difficulty: 1 Easy Topic: Public and Private Colleges and Universities Learning Objective: 15-02 Describe financial reporting for public and private colleges and universities. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

4) A private college would record a federal grant received to test a medical device that the federal government intends to patent as Contributions—With Donor Restrictions. Answer: FALSE Difficulty: 1 Easy Topic: Operating Statements Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 5) Contributions with no eligibility requirement restricted by an external donor for a particular operating purpose would be reported as increases to restricted fund balances by a public college or university and as an addition to net assets with donor restrictions by a private college or university. Answer: TRUE Difficulty: 2 Medium Topic: Operating Statements Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 6) Tuition refunds are recorded by debiting Tuition and Fees—Unrestricted. Answer: TRUE Difficulty: 1 Easy Topic: Operating Statements Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

7) A private university following the recommendations of the National Association of College and University Business Officers (NACUBO) chart of accounts for reporting expenses must disclose expenses by program and support function in the notes. Answer: TRUE Difficulty: 1 Easy Topic: Operating Statements Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 8) Term endowments are donor restricted resources whose principal is to be maintained intact until the happening of a particular event or the passage of a stated period of time. Answer: TRUE Difficulty: 1 Easy Topic: Endowments Learning Objective: 15-05 Discuss issues related to colleges and universities, such as planned giving, measuring performance, auditing, and federal financial assistance. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 9) Earnings on a private college's endowment investments may increase net assets without donor restrictions or net assets with donor restrictions, or both. Answer: TRUE Difficulty: 1 Easy Topic: Endowments Learning Objective: 15-05 Discuss issues related to colleges and universities, such as planned giving, measuring performance, auditing, and federal financial assistance. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

10) Receipt of a $500,000 gift by a private college that must be invested, the earning of which are to be used to support a "chaired" professorship in accounting, would be recorded as an increase in net assets with donor restrictions. Answer: TRUE Difficulty: 2 Medium Topic: Endowments Learning Objective: 15-05 Discuss issues related to colleges and universities, such as planned giving, measuring performance, auditing, and federal financial assistance. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 11) An annuity agreement requires that a college pay the donor (or other designated individual) a fixed dollar amount at specified time intervals. Answer: TRUE Difficulty: 1 Easy Topic: Split-Interest Agreements Learning Objective: 15-05 Discuss issues related to colleges and universities, such as planned giving, measuring performance, auditing, and federal financial assistance. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 12) A statement of cash flows is required by GAAP for both private colleges and universities and public colleges and universities engaged in business-type activities. Answer: TRUE Difficulty: 1 Easy Topic: Statement of Cash Flows Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

13) Private colleges and universities report term endowments as net assets with donor restrictions until the term has expired. Answer: TRUE Difficulty: 1 Easy Topic: Endowments Learning Objective: 15-05 Discuss issues related to colleges and universities, such as planned giving, measuring performance, auditing, and federal financial assistance. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 14) Public colleges and universities that use business-type reporting must present segment information in the notes to the financial statements. Answer: TRUE Difficulty: 1 Easy Topic: Segment Reporting Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 15) The Uniform Prudent Management of Institutional Funds Act (UPMIFA) applies primarily to colleges and universities. Answer: FALSE Difficulty: 1 Easy Topic: Uniform Prudent Management of Institutional Funds Act Learning Objective: 15-05 Discuss issues related to colleges and universities, such as planned giving, measuring performance, auditing, and federal financial assistance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal

16) The organizational form of a college can be governmental, nongovernmental not-for-profit, or for-profit. Answer: TRUE Difficulty: 1 Easy Topic: Introduction to Accounting for Colleges and Universities Learning Objective: 15-01 Distinguish between generally accepted accounting principles for public and private colleges and universities. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 17) The National Association of College and University Business Officers (NACUBO) provides second-tier GAAP for private colleges and universities. Answer: FALSE Difficulty: 1 Easy Topic: Accounting and Financial Reporting Standards Learning Objective: 15-01 Distinguish between generally accepted accounting principles for public and private colleges and universities. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 18) Loan assets represent loans made by a university to an external organization, and would be recorded by debiting Investments. Answer: FALSE Difficulty: 1 Easy Topic: Statement of Net Position or Financial Position Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

19) Private colleges report intangible assets as a separate asset classification; whereas, public colleges report intangible assets as part of the capital asset classification. Answer: TRUE Difficulty: 2 Medium Topic: Statement of Net Position or Financial Position Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 20) Both public and private universities report an infrastructure classification. Answer: FALSE Difficulty: 2 Medium Topic: Statement of Net Position or Financial Position Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 21) Colleges and universities will report tuition waivers as either a contra-revenue account or an expense, depending on the purpose for which the waiver is given. Answer: TRUE Difficulty: 2 Medium Topic: Operating Statements Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

22) A split-interest agreement is when the university and another beneficiary share in the benefits from a donor's gift. Answer: TRUE Difficulty: 1 Easy Topic: Split-Interest Agreements Learning Objective: 15-05 Discuss issues related to colleges and universities, such as planned giving, measuring performance, auditing, and federal financial assistance. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 23) The Uniform Prudent Management of Institutional Funds Act specifies the spending rate a not-for-profit should use when establishing its expenditure policies. Answer: FALSE Difficulty: 1 Easy Topic: Uniform Prudent Management of Institutional Funds Act Learning Objective: 15-05 Discuss issues related to colleges and universities, such as planned giving, measuring performance, auditing, and federal financial assistance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal 24) Only public colleges and universities are subject to the federal single audit requirements. Answer: FALSE Difficulty: 1 Easy Topic: Auditing Colleges and Universities Learning Objective: 15-05 Discuss issues related to colleges and universities, such as planned giving, measuring performance, auditing, and federal financial assistance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 25) The college scorecard allows students and parents to assess colleges' and universities' performance based on metrics such as affordability and graduation rates. Answer: TRUE Difficulty: 1 Easy Topic: Performance Measures Learning Objective: 15-05 Discuss issues related to colleges and universities, such as planned giving, measuring performance, auditing, and federal financial assistance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 8

26) An example of a college outcome performance metric would be performance on nationally ranked exams such as the CPA exam. Answer: TRUE Difficulty: 1 Easy Topic: Performance Measures Learning Objective: 15-05 Discuss issues related to colleges and universities, such as planned giving, measuring performance, auditing, and federal financial assistance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 27) Colleges and universities frequently present outcome measures rather than output measures. Answer: FALSE Difficulty: 1 Easy Topic: Performance Measures Learning Objective: 15-05 Discuss issues related to colleges and universities, such as planned giving, measuring performance, auditing, and federal financial assistance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 28) Which of the following statements is true regarding generally accepted accounting principles (GAAP) for colleges and universities? A) The FASB has set standards for private and public colleges and universities from the time of its inception in 1974. B) The National Association of Colleges and University Business Officers (NACUBO) provides category (b) accounting principles under the FASB GAAP hierarchy. C) Public and private colleges and universities are subject to the requirements in the AICPA audit and accounting guide for Not-for-Profit Entities. D) The GASB is responsible for establishing GAAP for public colleges and universities. Answer: D Difficulty: 1 Easy Topic: Accounting and Financial Reporting Standards Learning Objective: 15-01 Distinguish between generally accepted accounting principles for public and private colleges and universities. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

29) What type of college or university must report expenses by functional classification? A) Both private and public colleges and universities. B) Private colleges and universities. C) Public colleges and universities. D) Neither private nor public colleges and universities. Answer: B Difficulty: 1 Easy Topic: Operating Statements Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 30) GASB accounting and reporting standards applicable to public colleges and universities: A) Are now the same as FASB standards to permit comparability between public and private colleges and universities. B) Permit public colleges and universities to use the AICPA model which differs substantially from the reporting model used by private colleges and universities subject to FASB jurisdiction. C) Permit public colleges and universities to optionally follow FASB standards. D) Differ in some significant ways from FASB standards applicable to private colleges and universities. Answer: D Difficulty: 1 Easy Topic: Reporting and Accounting Issues Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

31) A private college would report which of the following assets differently than a public college? A) Land. B) Intangible assets. C) Collections. D) Equipment. Answer: B Difficulty: 2 Medium Topic: Statement of Net Position or Financial Position Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 32) Cactus College, a small private college, received a research grant from NACUBO to study whether service efforts and accomplishments measures improve institutional performance. In accordance with FASB standards the grant would be reported as an increase in: A) Net assets without donor restrictions. B) Net assets with donor restrictions. C) Deferred revenue. D) Board-designated net assets. Answer: B Difficulty: 2 Medium Topic: Operating Statements Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

33) Which of the following receipts may properly be accounted for as an increase in net assets without donor restrictions by a private college? A) Student tuition and fees. B) Gift from an alumnus for a new college of business building. C) Federal grant for genetic research. D) Acceptance of assets, the income from which will be paid to the donor. Answer: A Difficulty: 2 Medium Topic: Operating Statements Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 34) It would not make economic sense for a university to accept a split-interest agreement in which a fixed annuity is payable to the donor if: A) The donor has attached conditions to the gift. B) The university has no immediate need for the assets. C) The sum of future annuity payments plus interest thereon exceeds the fair market value of the assets. D) The present value of the future annuity payments and other liabilities exceed the fair market value of the assets. Answer: D Difficulty: 2 Medium Topic: Split-Interest Agreements Learning Objective: 15-05 Discuss issues related to colleges and universities, such as planned giving, measuring performance, auditing, and federal financial assistance. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry

35) The FASB requires that private colleges and universities prepare which of the following financial statements? A) A statement of net position. B) A statement of net changes in financial position. C) A statement of activities. D) The FASB requires private colleges and universities to prepare all of the above statements. Answer: C Difficulty: 1 Easy Topic: Public and Private Colleges and Universities Learning Objective: 15-02 Describe financial reporting for public and private colleges and universities. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 36) Which of the following items would not affect the amounts reported in the Revenues and Gains section of the statement of activities for a private college or university? A) Student tuition and fees. B) Tuition and fees discounts and allowances. C) Net assets released from restriction. D) Deferred revenues. Answer: D Difficulty: 1 Easy Topic: Reporting and Accounting Issues Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

37) A college has collected returnable dormitory room deposits from students. How would these deposits be reported by the college? A) A current liability. B) Unrestricted revenue. C) Restricted revenue. D) A long-term liability. Answer: A Difficulty: 2 Medium Topic: Statement of Net Position or Financial Position Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 38) Which of the following is required as part of a complete set of financial statements for a public college or university engaged only in business-type activities? A) Statement of changes in operations. B) Statement of revenues, expenses, and changes in net position. C) Statement of activities. D) Statement of functional expenses. Answer: B Difficulty: 1 Easy Topic: Public and Private Colleges and Universities Learning Objective: 15-02 Describe financial reporting for public and private colleges and universities. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

39) Colleges and universities often make loans to students. How would these loans be reported on the financial statements? A) An expense. B) A receivable. C) A liability. D) An investment. Answer: B Difficulty: 1 Easy Topic: Statement of Net Position or Financial Position Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 40) Which of the following statements is required for both a private university and a governmentally owned public university engaged only in business-type activities? A) Statement of cash flows. B) Statement of net position. C) Statement of activities. D) Statement of revenues, expenses, and changes in net position. Answer: A Difficulty: 1 Easy Topic: Public and Private Colleges and Universities Learning Objective: 15-02 Describe financial reporting for public and private colleges and universities. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

41) Tuition scholarships for which there is no intention of performance from the student should be classified by a private university as A) Reductions of gross revenue to arrive at net revenue. B) Not recognized in the financial statement. C) Increases in expenditures. D) Reductions of gross revenue or as expenses provided they are consistently classified in the same manner from year to year. Answer: A Difficulty: 2 Medium Topic: Operating Statements Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 42) Culver City College, a public college, has a 10-week summer session that starts on June 25, 2020, so that one week is held during FY 2020 and the other nine weeks meet during FY 2021. Tuition and fees in the amount of $1,000,000 were collected from students for classes to be conducted in this session. What amount should Culver City College recognize as unrestricted revenue in each of the years ended (FYE) June 30, 2020 and June 30, 2021? FYE 2020 A. $ 100,000 B. $ 0 C. $ 1,000,000 D. $ 500,000 A) Choice A. B) Choice B. C) Choice C. D) Choice D.

FYE 2021 $ 900,000 $ 1,000,000 $ 0 $ 500,000

Answer: A Difficulty: 3 Hard Topic: Operating Statements Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Reporting

43) An alumnus donates securities to a private college and stipulates that the principal be held in perpetuity and income from the securities be used for faculty travel. Dividends received from the securities should be recognized as increases in: A) Endowments. B) Net assets without donor restrictions. C) Deferred revenue. D) Net assets with donor restrictions. Answer: D Difficulty: 2 Medium Topic: Endowments Learning Objective: 15-05 Discuss issues related to colleges and universities, such as planned giving, measuring performance, auditing, and federal financial assistance. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 44) During the years ended June 30, 2020 and 2021, Jackson University, a private university, conducted a cancer research project financed by a $1,000,000 gift from an alumnus. The entire amount was pledged by the donor on July 10, 2019. The gift was restricted to the financing of this particular research project. During the two-year research period, Jackson's gift receipts from the alumnus and research expenses related to the research project were as follows for each fiscal year (FY): FY 2020 $ 200,000 $ 100,000

Gift receipts Cancer research expenses

FY 2021 $ 800,000 $ 900,000

What amount of net assets was released from restriction in 2020? A) $200,000. B) $100,000. C) $1,000,000. D) $0. Answer: B Difficulty: 3 Hard Topic: Reporting and Accounting Issues Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Reporting

45) During the years ended June 30, 2020 and 2021, Jackson University, a private university, conducted a cancer research project financed by a $1,000,000 gift from an alumnus. The entire amount was pledged by the donor on July 10, 2019. The gift was restricted to the financing of this particular research project. During the two-year research period, Jackson's gift receipts from the alumnus and research expenses related to the research project were as follows for each fiscal year (FY): FY 2020 $ 200,000 $ 100,000

Gift receipts Cancer research expenses

FY 2021 $ 800,000 $ 900,000

How much had net assets with donor restrictions increased as of the end of FY 2021? A) $1,000,000. B) $100,000. C) $(100,000). D) $0. Answer: D Difficulty: 3 Hard Topic: Reporting and Accounting Issues Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Reporting 46) How would estimated uncollectible tuition and fees be reported on the financial statements of a university? I. It would be reported as part of net revenue by a public university. II. It would be reported as an operating expense by a public university. III. It would be reported as an operating expense by a private university. A) I only. B) II only. C) III only. D) Both I and III are correct methods of reporting estimated uncollectible tuition and fees. Answer: A Difficulty: 1 Easy Topic: Operating Statements Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 18

47) During the year ended June 30, 2020, Hopkins College, a private college, received a federal government grant of $800,000 for research on the role of music in improving math skills for students. Expenses that were not capital in nature for this research amounted to $100,000 during the same year. Under FASB standards, which of the following best represents how Hopkins College would report this nonexchange transaction in the net assets section for the year ended June 30, 2020? Without Donor Restrictions A. $ 0 B. $ 0 C. $ 100,000 D. $ 800,000 A) Choice A. B) Choice B C) Choice C. D) Choice D.

With Donor Restrictions $ 800,000 $ 700,000 $ 700,000 $ 0

Answer: B Difficulty: 3 Hard Topic: Reporting and Accounting Issues Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Reporting 48) Which of the following is not a classification of revenues for a college or university as recommended by the National Association of College and University Business Officers (NACUBO)? A) Sporting events. B) State appropriations. C) Investment income. D) Contributions. Answer: A Difficulty: 1 Easy Topic: Operating Statements Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

49) State educational appropriations received by a public university are classified as which of the following on the statement of revenues, expenses, and changes in net position? A) Nonoperating revenue. B) Operating revenue. C) Other financing source. D) Increase in unrestricted net position. Answer: A Difficulty: 2 Medium Topic: Public and Private Colleges and Universities Learning Objective: 15-02 Describe financial reporting for public and private colleges and universities. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 50) Which of the following is a typical classification of a functional expense in a college or university? A) Academic wages and benefits. B) Student support. C) Institutional support. D) Depreciation. Answer: C Difficulty: 1 Easy Topic: Operating Statements Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

51) Which of the following measures may be useful to decision makers evaluating the financial condition of a college or university? A) Number of graduates. B) Composite financial index. C) Faculty productivity. D) Graduation rate. Answer: B Difficulty: 1 Easy Topic: Performance Measures Learning Objective: 15-05 Discuss issues related to colleges and universities, such as planned giving, measuring performance, auditing, and federal financial assistance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 52) Which of the following statements about the Uniform Prudent Management of Institutional Funds Act (UPMIFA) is correct? A) It establishes a maximum total return rate for investments. B) It requires that the spending rate for the return on investments be no more than five percent. C) It allows institutions to release net assets from restrictions if certain criteria are met. D) It requires that specific policies concerning solicitation of donations be established. Answer: C Difficulty: 1 Easy Topic: Uniform Prudent Management of Institutional Funds Act Learning Objective: 15-05 Discuss issues related to colleges and universities, such as planned giving, measuring performance, auditing, and federal financial assistance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Legal

53) The Academy, a private college, provided tuition waivers of $500,000. Of the amount $200,000 was for students teaching courses as graduate assistants and $300,000 was simply an award for scholastic accomplishments. Another $100,000 was given is tuition refunds. What amount would The Academy record as Tuition and Fees Discounts and Allowances? A) $600,000. B) $500,000. C) $400,000. D) $300,000. Answer: D Difficulty: 3 Hard Topic: Operating Statements Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Reporting 54) How would a private college or university report its estimate for uncollectible tuition and fees on its statement of activities? A) A contra-revenue account titled Provision for Doubtful Accounts. B) A direct reduction of Tuition and Fees—Unrestricted. C) An operating expense titled Provision for Doubtful Accounts. D) An operating expense titled Bad Debt Expense. Answer: B Difficulty: 1 Easy Topic: Operating Statements Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

55) Which of the following statements concerning the audits of colleges and universities is true? A) Both public and private colleges and universities are subject to a single audit if they expend over $750,000 in federal funds in a fiscal year. B) The nongovernmental nature of public colleges and universities means they are exempt from the requirements of the single audit, but they are required to have an audit conducted under generally accepted auditing standards. C) Public colleges and universities are exempt from the requirements of the single audit, but they are required to follow the Uniform Guidance to ensure only allowable costs are charged to federal grants. D) Both public and private colleges and universities are exempt from the requirements of the single audit, but they are both required to follow the Uniform Guidance to ensure only allowable costs are charged to federal grants. Answer: A Difficulty: 1 Easy Topic: Auditing Colleges and Universities Learning Objective: 15-05 Discuss issues related to colleges and universities, such as planned giving, measuring performance, auditing, and federal financial assistance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 56) The composite financial index (CFI), a measure of financial health for colleges and universities, includes which of the following ratios? A) Primary reserve ratio. B) Net operating revenues ratio. C) Return on net assets ratio. D) All of these ratios are included in the CFI. Answer: D Difficulty: 1 Easy Topic: Performance Measures Learning Objective: 15-05 Discuss issues related to colleges and universities, such as planned giving, measuring performance, auditing, and federal financial assistance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry

57) For each of the following definitions, indicate the key term from the list that best matches by placing the appropriate definition. A. Term endowments B. Annuity agreements C. Collections D. Pooled life income agreements E. Spending rate F. Total return 1. Agreements to pay the donor the income earned by assets donated to an organization over the specified beneficiary’s lifetime 2. A comprehensive measure of the rate of investment return, which includes unrealized and realized gains and losses, as well as interest and dividend income 3. A contribution that must be retained intact until the happening of a specific event or the passage of a stated period of time 4. The proportion of total return that may prudently be used by an institution for current purposes 5. Agreement to pay stipulated amounts periodically to the donor of assets by the recipient organization Answer: 1. D, 2. F, 3. A, 4. E, 5. B Explanation: No further explanation details are available for this problem. Difficulty: 1 Easy Topic: Reporting and Accounting Issues; Planned Giving Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows.; 15-05 Discuss issues related to colleges and universities, such as planned giving, measuring performance, auditing, and federal financial assistance. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry

58) A private university receives $1,000,000 in the current fiscal year as a grant restricted for a specific research project and incurs expenses of $400,000 related to the research project during the current fiscal year. Make all necessary journal entries to record the transactions related to the grant for the current fiscal year. Prepare journal entries to record the transactions related to the grant for the current fiscal year. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) Answer:

Explanation: No further explanation details are available for this problem. Difficulty: 3 Hard Topic: Reporting and Accounting Issues Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Reporting

59) Prepare in general journal form the entries required for each of the following selected transactions of Northern University, a state-funded public institution engaged only in business-type activities. Some of these transactions are related and some are not. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) 1. A generous alumnus donated $300,000 that can only be used for research on diabetes. The full $300,000 was received in the current fiscal year. 2. During the current fiscal year, expenses of $150,000 were made in cash for diabetes research (see item 1 above). 3. $2,000,000 in long-term bonds was issued to construct a new parking garage on campus. 4. During the current fiscal year, the parking garage (see item 3 above) was partially completed at a total cash expenditure of $1,800,000. 5. During the current fiscal year, interest was paid in the amount of $120,000 on the long-term bonds issued for the parking garage project (see item 3 above). Answer:

60) Manthei University, a private university, has provided the following information concerning selected transactions. Prepare in general journal form the entries required for each of the transactions. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) 1. The university was awarded a federal grant in the amount of $1,800,000 to be used for a specified research project (determined to be a nonexchange transaction). During the year the entire $1,800,000 was received and expenses for the specified project totaled $1,000,000. 2. Ira Beaker, a renowned chemist and alumnus, donated $7,000,000 to be used for the construction of new chemistry building to be named Beaker Hall. The gift is to be paid to the university in equal installments over a two-year period; the sum for the current year was received in cash. 3. Cash outlays of $2,750,000 were made during the year for construction in progress on the new chemistry building. Other construction projects completed during the year, also financed by restricted resources, amounted to $1,500,000 for buildings and $500,000 for improvements other than buildings. There was no debt financing used for these projects. 4. During the year bonds with a face value of $180,000 were retired.

Answer:

61) "Tuition and fees should be recorded as revenues of colleges and universities even though they must be reported net of tuition refunds, scholarships, and fellowships." Do you agree or disagree with this statement? If you disagree, explain how refunds, scholarships, and fellowships should be recorded. Answer: Agree. All colleges and universities should recognize revenues on the accrual basis. Under both FASB and GASB standards, gross tuition and fees should be recorded as revenue even though some of the revenue will be offset by tuition waivers, scholarships, and fellowships. Refunds of tuition or fees are charged directly against the Tuition and Fees account. Difficulty: 2 Medium Topic: Operating Statements Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows. Bloom's: Understand AACSB: Communication AICPA: FN Reporting 62) If a private university receives $1,000,000 in the current fiscal year as a grant restricted for a specific research project and makes expenditures amounting to $400,000 during the current fiscal year properly chargeable to the grant, how much should be reported as revenues in the current fiscal year? Explain. Answer: None of the grant would be considered revenue, it would be considered contributions. The entire $1,000,000 should be recorded as Contributions—With Donor Restrictions. Since $400,000 has been expended to meet the purpose restriction, $400,000 of net assets with donor restrictions would be released from restriction. For the year, the net assets with donor restrictions have increased by a net amount of $600,000. Difficulty: 3 Hard Topic: Reporting and Accounting Issues Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Reporting

63) Refunds of college or university tuition or fees should be recorded as expenses in the period in which they are made. Do you agree? Why or why not? Answer: Disagree. Both private and public colleges and universities should report refunds of tuition or fees as a reduction of gross tuition and fees revenue. Difficulty: 2 Medium Topic: Operating Statements Learning Objective: 15-03 Discuss accounting and reporting issues for all colleges and universities, such as accounting for assets, liabilities, and net assets/net position; accounting for revenues and expenses; and accounting for cash flows. Bloom's: Understand AACSB: Communication AICPA: FN Reporting

Accounting for Governmental and Nonprofit Entities, 18e (Reck) Chapter 16 Accounting for Health Care Organizations 1) Financial reporting standards for all hospitals are established by the FASB. Answer: FALSE Difficulty: 1 Easy Topic: GAAP for health care providers Learning Objective: 16-01 Identify the different organizational forms and the related authoritative accounting literature for health care organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 2) Patient service revenues and related receivables exclude charges for charity care services. Answer: TRUE Difficulty: 1 Easy Topic: Operating Statements Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 3) In accounting for health care entities, the account Provision for Bad Debts should be reported as a contra-revenue, rather than as an expense. Answer: TRUE Difficulty: 1 Easy Topic: Operating Statements Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

4) Under the FASB GAAP hierarchy the AICPA Audit and Accounting Guide Health Care Entities would be category (b) authoritative guidance. Answer: FALSE Difficulty: 1 Easy Topic: GAAP for health care providers Learning Objective: 16-01 Identify the different organizational forms and the related authoritative accounting literature for health care organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 5) In accordance with the FASB Codification, an expense for diabetes research that was financed by restricted contributions would be recorded as a decrease in net assets without donor restrictions by a not-for-profit health care organization. Answer: TRUE Difficulty: 2 Medium Topic: Operating Statements Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 6) FASB standards require that not-for-profit health care entities prepare a statement of changes in net assets. Answer: TRUE Difficulty: 1 Easy Topic: Statement of changes in net assets Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

7) Under GAAP, both governmental and nongovernmental not-for-profit health care entities are required to identify operating and nonoperating activity on their operating statements. Answer: FALSE Difficulty: 1 Easy Topic: Operating Statements Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 8) Health care is provided by organizations that may be for-profit, not-for-profit, or governmental; although over half of all nonfederal health care is provided by not-for-profit entities. Answer: TRUE Difficulty: 1 Easy Topic: Introduction to accounting for health care organizations Learning Objective: 16-01 Identify the different organizational forms and the related authoritative accounting literature for health care organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 9) Similar to other not-for-profit entities, health care entities are required under FASB standards to report program and support functional expenses. Answer: TRUE Difficulty: 1 Easy Topic: Operating Statements Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 10) Assets set aside by the governing board for the eventual construction of a hospital addition should be recorded as "assets limited as to use." Answer: TRUE Difficulty: 1 Easy Topic: Balance sheet or statement of net position Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 3

11) A nongovernmental not-for-profit health care entity would report the net asset categories unrestricted, restricted, and net investment in capital assets. Answer: FALSE Difficulty: 1 Easy Topic: Balance sheet or statement of net position Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 12) Continuing care retirement communities (CCRC) provide residential care in a facility, along with some level of long-term medical care that is less intensive that hospital care. Answer: TRUE Difficulty: 1 Easy Topic: Continuing care retirement communities Learning Objective: 16-04 Describe other accounting issues in the health care industry, including legislation, auditing, taxation and regulation, prepaid health care services, and continuing care retirement communities. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry 13) All health care organizations report investments at fair value and report unrealized gains or losses on the statement of operations. Answer: FALSE Difficulty: 2 Medium Topic: Balance sheet or statement of net position Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

14) The "equity" section (assets minus liabilities) of a health care entity's balance sheet or statement of net position will indicate whether the health care organization is for-profit, not-for-profit, or governmental. Answer: TRUE Difficulty: 2 Medium Topic: Balance sheet or statement of net position Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 15) A contractual adjustment is recorded as a contra-revenue account. Answer: TRUE Difficulty: 1 Easy Topic: Operating Statements Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 16) The goal of financial and operational analysis of a health care entity is to determine if the entity is profitable. Answer: FALSE Difficulty: 1 Easy Topic: Financial and operational analysis Learning Objective: 16-05 Explain financial and operational analysis of health care organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: BB Industry

17) Similar to for-profit entities, under FASB standards, not-for-profit health care entities are required to classify investments in debt securities into trading, available-for-sale, and held to maturity for reporting purposes. Answer: FALSE Difficulty: 1 Easy Topic: Balance sheet or statement of net position Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 18) The purpose of a performance indicator is to provide an operating measure for not-for-profit health care organizations that is equivalent to income from continuing operations of for-profit health care organizations. Answer: TRUE Difficulty: 1 Easy Topic: Operating Statements Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 19) The GASB and the FASB provide the same criteria for recognizing and reporting services donated to a health care entity. Answer: FALSE Difficulty: 1 Easy Topic: Operating Statements Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

20) Unlike other not-for-profit entities, the FASB requires health care entities to prepare a statement of changes in net assets. Answer: TRUE Difficulty: 2 Medium Topic: Statement of changes in net assets Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 21) The format for a not-for-profit health care entity's statement of operations is the same as that for other types of not-for-profits; the FASB requires a different title on the statement since most revenues are derived from user charges. Answer: FALSE Difficulty: 2 Medium Topic: Operating Statements Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 22) In accordance with the FASB Codification estimated uncollectible account amounts are reported in the same manner for patient accounts receivable and donor pledges receivable. Answer: FALSE Difficulty: 1 Easy Topic: Operating Statements Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

23) Assets limited as to use are assets without donor restrictions whose use is limited by parties other than donors or grantors. Answer: TRUE Difficulty: 1 Easy Topic: Balance sheet or statement of net position Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 24) In accordance with the FASB Codification, net assets released from restriction should be included as part of the performance indicator on a health care entity's statement of operations. Answer: FALSE Difficulty: 1 Easy Topic: Operating Statements Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 25) Both the FASB and the GASB would require that a contribution received for the construction of a future medical facility be reported as an investing activity on the statement of cash flows. Answer: FALSE Difficulty: 2 Medium Topic: Statement of Cash Flows Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 26) When assessing the financial condition of a health care entity, the excess margin percentage includes only income from operating activities. Answer: FALSE Difficulty: 2 Medium Topic: Financial and operational analysis Learning Objective: 16-05 Explain financial and operational analysis of health care organizations. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 8

27) When assessing the financial condition of a health care entity, the average age of plant measure assists with assessing the short-term need for capital resources. Answer: TRUE Difficulty: 2 Medium Topic: Financial and operational analysis Learning Objective: 16-05 Explain financial and operational analysis of health care organizations. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 28) Which of the following entities would not be considered a health care organization? A) The Heart Research Institute. B) The St. George Hospital. C) The Family Practice Medical Clinic. D) The Northeast Health Maintenance Organization. Answer: A Difficulty: 1 Easy Topic: Introduction to accounting for health care organizations Learning Objective: 16-01 Identify the different organizational forms and the related authoritative accounting literature for health care organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 29) Which of the following is (are) considered an authoritative source of GAAP for nongovernmental not-for-profit health care entities? A) The AICPA Audit and Accounting Guide Health Care Entities. B) The Healthcare Financial Management Associations' Financial Accounting and Reporting Manual. C) The FASB Accounting Standards Codification (ASC). D) All of the options given are considered GAAP according to the GAAP hierarchy. Answer: C Difficulty: 1 Easy Topic: GAAP for health care providers Learning Objective: 16-01 Identify the different organizational forms and the related authoritative accounting literature for health care organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

30) Which of the following is not a financial statement prepared by nongovernmental not-for-profit health care entities? A) Statement of changes in net assets. B) Statement of revenues, expenses, and changes in net assets. C) Balance sheet. D) Statement of cash flows. Answer: B Difficulty: 1 Easy Topic: Reporting and Accounting Issues Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 31) Contractual adjustments that arise from differences between the gross charge for patient services and the amount paid by a third party payor are reported as: A) Deductions from gross patient revenue in arriving at net patient revenue. B) Disclosures in the notes to the financial statements. C) Either deductions from gross patient revenue or disclosure in the notes, depending on the dollar amount of the adjustments relative to billings. D) Bad debt expense. Answer: A Difficulty: 1 Easy Topic: Operating Statements Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 32) Which of the following would be considered an asset limited as to use? A) Cash donated for an endowment. B) Cash from a federal research grant, which is to be used for water quality research. C) Cash designated for equipment acquisitions by the board of directors. D) Cash contributions that are to be used for the building fund. Answer: C Difficulty: 2 Medium Topic: Balance sheet or statement of net position Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 10

33) Which of the following statements is true about diagnosis-related groups (DRGs)? A) DRGs are the basis for a cost accounting method that groups costs together by departments performing the services. B) A DRG is a case-mix classification scheme that is used to determine the payment provided to the hospital for inpatient services, regardless of how much the hospital spends to treat a patient. C) The federal Medicare system of retroactive payment for services depends on DRGs. D) The DRGs method is the prevailing practice of billing third-party payors for a health care organization's average cost for providing care for locally defined similar medical conditions. Answer: B Difficulty: 2 Medium Topic: Operating Statements Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 34) The primary source of revenue for most hospitals is: A) Nonexchange transactions, such as contributions. B) Exchange transactions, such as fees for services. C) Investment income. D) Capitation fees from health maintenance organizations. Answer: B Difficulty: 1 Easy Topic: Operating Statements Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

35) A hospital originally recorded all patient services it provided as a $500,000 debit to accounts receivable. Upon review the hospital determined that a contractual adjustment of $200,000 needs to be made, and estimated bad debts of $5,000 need to be recorded. In addition, at the time the receivable was recorded the hospital did not realize $100,000 should be considered charity services. Based on the information provided, what is the net amount of accounts receivable that the hospital would report on its financial statements? A) $495,000. B) $300,000. C) $200,000. D) $195,000. Answer: D Difficulty: 3 Hard Topic: Reporting and Accounting Issues Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Reporting 36) Charity service and bad debts in a government hospital that follows business-type accounting are: A) Both reported as deductions from gross patient revenue in arriving at net patient revenue. B) Both reported as expenses. C) Reported differently, with charity service disclosed in the notes to the financial statements and bad debts reported as a deduction from revenue. D) Reported differently, with charity service reported as a deduction from gross patient revenue and bad debts reported as an expense. Answer: C Difficulty: 2 Medium Topic: Reporting and Accounting Issues Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

37) Which of the following volunteer services is most likely to be reported by a nongovernmental not-for-profit hospital as contribution revenue and an expense? A) Community members who plant flowers on the grounds once a year in the spring. B) Volunteers in the gift shop who work a few hours a day serving customers. C) Nurses from a religious organization who volunteer to assist in the care of critically ill children. D) An accountant who is a member of the board of directors. Answer: C Difficulty: 2 Medium Topic: Operating Statements Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 38) Which of the following could be included in the performance indicator measure provided by a nongovernmental not-for-profit hospital? A) Contribution to an endowment. B) Gain on sale of equipment. C) Grant restricted for diabetes research. D) Interest income that is donor restricted. Answer: B Difficulty: 2 Medium Topic: Operating Statements Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 39) Which of the following would usually be considered as net assets with donor restrictions in a nongovernmental not-for-profit hospital? A) Funds designated by the board of directors for future equipment purchases. B) Donated services by senior citizens. C) A permanent endowment received from the city's leading citizen. D) Sales from the hospital gift shop. Answer: C Difficulty: 2 Medium Topic: Reporting and Accounting Issues Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 13

40) Where does a nongovernmental not-for-profit health care entity report increases that have occurred in its net assets with donor restrictions? A) Statement of changes in net assets. B) Statement of operations. C) Balance sheet. D) Similar to governmental health care entities, it would not report the change on the face of a financial statement. Answer: A Difficulty: 1 Easy Topic: Statement of changes in net assets Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 41) Contractual Adjustments is properly characterized as: A) An expense. B) An other financing use. C) A liability. D) A contra revenue. Answer: D Difficulty: 1 Easy Topic: Operating Statements Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 42) In accordance with the FASB Codification, donated medicines that normally would be purchased by a hospital should be recorded at fair value and credited to which of the following? A) Net Patient Service Revenue. B) Other Revenue. C) Nonoperating Gains. D) Deferred Revenues. Answer: B Difficulty: 2 Medium Topic: Operating Statements Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 14

43) An annual contributor to a nongovernmental not-for-profit hospital made an unrestricted pledge in October 2019 that will be paid in March 2020. Assuming the hospital's fiscal year-end is December 31, 2019, the pledge should be credited to: A) Contributions—With Donor Restrictions in 2019. B) Contributions—Without Donor Restrictions in 2019. C) Contributions—With Donor Restrictions in 2020. D) Contributions—Without Donor Restrictions in equal amounts in 2019 and 2020. Answer: A Difficulty: 2 Medium Topic: Operating Statements Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 44) How would the cash acquisition of equipment be reported on a health care entity's statement of cash flows? A) Investing activity applying GASB standards. B) Investing activity applying FASB standards. C) Financing activity applying FASB standards. D) Operating activity applying GASB standards. Answer: B Difficulty: 2 Medium Topic: Statement of Cash Flows Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 45) Where would a capitation fee be reported on a health care entity's financial statements? A) Service revenue. B) Other professional expense. C) Other revenue. D) Short-term liability. Answer: A Difficulty: 1 Easy Topic: Operating Statements Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 15

46) In accordance with the FASB Codification, which of the following would be an appropriate performance indicator for a not-for-profit health care organization? A) Revenues. B) Excess of revenues and gains over expenses and losses. C) Expenses and losses. D) Contributions to long-lived assets. Answer: B Difficulty: 2 Medium Topic: Operating Statements Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 47) The GASB requires business-type health care organizations to prepare which of the following financial statements? A) Statement of revenues, expenses, and changes in net position; statement of net position; and statement of cash flows. B) Statement of operations; statement of net assets; and a statement of cash flows. C) Statement of revenues, expenses, and changes in net position; and statement of net position. D) Statement of activities; statement of net position; statement of changes in net position; and statement of cash flows. Answer: A Difficulty: 1 Easy Topic: Reporting and Accounting Issues Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

48) Which of the following statements concerning the Patient Protection and Affordable Care Act (also known as the Affordable Care Act) is true? A) Since the Act primarily focuses on the insurance industry there is little impact on health care accounting. B) Since the Act is a federal law it only affects governmental health care facilities. C) The Act has impacted delivery of services, as well as the cost and compensation of services. D) The Act had no impact on a nongovernmental hospital's Internal Revenue Service filing of the Form 990, since the Act is not under the oversight of the Internal Revenue Service. Answer: C Difficulty: 2 Medium Topic: Patient Protection and Affordable Care Act Learning Objective: 16-04 Describe other accounting issues in the health care industry, including legislation, auditing, taxation and regulation, prepaid health care services, and continuing care retirement communities. Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry 49) Which of the following is shown on a statement of changes in net assets? A) An increase in net assets with donor restrictions. B) A gain on the sale of equipment. C) A loss from a discontinued operation. D) A contribution without donor restrictions. Answer: A Difficulty: 1 Easy Topic: Statement of changes in net assets Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

50) Which of the following would be considered service revenue of a health care entity? A) Revenue from the hospital cafeteria. B) Capitation fees received from a health maintenance organization. C) Fee revenue received for providing medical transcripts. D) Revenue received for the rental of an assisted living facility's conference room to a local not-for-profit. Answer: B Difficulty: 2 Medium Topic: Operating Statements Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 51) Financial and operational analysis of health care entities is useful to which of the following decision makers? A) Managers directly accountable for performance. B) Analysts determining the credit worthiness of the organization's debt. C) Third parties determining the appropriate payment based on costs. D) All of these decision makers find financial and operational analysis of health care entities useful. Answer: D Difficulty: 1 Easy Topic: Financial and operational analysis Learning Objective: 16-05 Explain financial and operational analysis of health care organizations. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 52) When evaluating the financial condition of health care entities, the cushion ratio provides: A) A measure of the capital structure of the organization. B) A measure of how efficiently an organization pays its bills. C) A measure of the efficiency of the collections function. D) An indicator of the profitability of the organization. Answer: A Difficulty: 2 Medium Topic: Financial and operational analysis Learning Objective: 16-05 Explain financial and operational analysis of health care organizations. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 18

53) For each of the following definitions, indicate the key term from the list that best matches by placing the appropriate definition. A. Contractual adjustments B. Capitation fees C. Charity care D. Diagnosis-related groups E. Prospective payment system F. Health maintenance organizations G. Performance indicator H. Third-party payor 1. A prepaid health care plan that functions as a broker of health care between the consumer/patient requiring services and the health care provider 2. Medicare’s system in which payments are based on allowed service costs within the same diagnosis-related group rather than on actual cost of services rendered 3. Fixed dollar amount of fees per person paid periodically by a third-party payor to a health care provider 4. The difference between the gross patient service revenue and the negotiated payment by third-party payors in arriving at net patient service revenue 5. Health services provided to persons with a demonstrated inability to pay Answer: 1. F, 2. E, 3. B, 4. A, 5. C Explanation: No further explanation details are available for this problem. Difficulty: 1 Easy Topic: Reporting and Accounting Issues Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

54) Record in general journal form the following selected transactions for Avalon General Hospital, a nongovernmental not-for-profit institution. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) 1. Gross charges for patient services rendered during the period amounted to $7,870,000, of which $350,000 represented charity care for indigent patients. 2. During the year the provision for bad debts was set at $190,000 and contractual adjustments amounted to $435,000. 3. A wealthy donor donated $2,000,000 to construct a new cardiology wing on the hospital. 4. During the year, the new cardiology wing (see item 3) was one-half completed at a cost of $1,000,000. Answer:

Difficulty: 3 Hard Topic: Reporting and Accounting Issues Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Reporting

55) Prepare general journal form for the following transactions of Bothwell Regional Hospital, a nongovernmental not-for-profit hospital. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) 1. For the month just ended the hospital received in cash $8,000 from the hospital's gift shop sales, and received donated medicines with a fair value of $47,000. These medicines are of the type the hospital normally would purchase. 2. The hospital's finance officer, in compliance with the directive of the governing board, invested $600,000 of operating cash in certificates of deposit to be held for future purchases of equipment. 3. New equipment costing $750,000 was purchased from money given to the hospital by a donor in a prior year to be held until needed for equipment purchases. 4. A federal grant was received in cash in the amount of $400,000 to be used for heart research. During the current year only $50,000 was spent for this research program.

Answer:

Explanation: No further explanation details are available for this problem. Difficulty: 3 Hard Topic: Reporting and Accounting Issues Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Reporting

56) Georgetown Hospital, a governmental hospital, recorded during its fiscal year ended September 30, gross patient services valued at $15,000,000, excluding charity care services of $1,600,000. However, contractual adjustments by third-party payors amounted to $1,200,000. In May of that year it received donated medical supplies worth $2,000; supplies it had planned to purchase had it not been for the gift. At year-end, the governing board set aside investments in the amount of $500,000 for future plant expansion and $250,000 to be invested with the related earnings used for a special prenatal care program. 1. In its operating statement for the year ended September 30, how much should Georgetown report as net patient services revenue? 2. For the year ended September 30, how should the donation of medical supplies be reported? 3. What amount of unrestricted net position should Georgetown report in its balance sheet as board designated, assuming it had no board designated net position at the beginning of the year? Answer: 1. $13,800,000. The $15,000,000 gross patient service revenue must be adjusted for the $1,200,000 contractual adjustments, which are contra-revenues. Charity care service is not recorded and has already been excluded from the $15,000,000. None of the other items are considered patient service revenue. 2. The donation should be reported as other revenue in the amount of $2,000 and as either supplies inventory or expense, depending on whether the donation was used in the current period. 3. Unrestricted net position should be reported in the amount of $750,000 ($500,000 for future plant expansion plus $250,000 for designated investments). Difficulty: 3 Hard Topic: Reporting and Accounting Issues Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Reporting 57) There are three main reasons why a nongovernmental not-for-profit hospital does not receive the full amount that it normally charges for a room: (1) contractual adjustments arising from transactions with third-party payors, (2) charity service provided to indigent patients, and (3) bad debts. Compare the accounting treatment for the three reasons listed. Answer: Current GAAP requires that contractual adjustments and bad debts be reported as deductions from gross patient revenue in arriving at net patient revenue. Charity service is not recorded at all but should be reported in the notes to the financial statements. Difficulty: 2 Medium Topic: Reporting and Accounting Issues Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Understand AACSB: Communication AICPA: FN Reporting

58) Congress mandated diagnosis-related groups (DRG) as a method for recording costs in health care organizations, in part to facilitate Medicare's prospective payment system. Explain what the DRG system is and describe the impact this change may have had on the cost accounting systems of health care organizations. Answer: Diagnosis-related groups (DRGs) is a case-mix classification scheme that is used to determine the payment provided to the hospital for inpatient services, regardless of how much the hospital spends to treat a patient. Health care providers, therefore, have an incentive to determine actual costs of services rendered: to keep their costs commensurate with payments for services. It is now common for most hospitals to have sophisticated systems to capture costs by procedure. Some payment methods, such as capitation fees in prepaid health care plans, shift a considerable amount of risk to the provider. That is, the fixed amount of revenue received per patient may not cover the costs of providing the service. Difficulty: 2 Medium Topic: Reporting and Accounting Issues Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Understand AACSB: Communication AICPA: BB Industry 59) Contrast the statement of cash flows that nongovernmental not-for-profit hospitals prepare to those that government hospitals prepare. Answer: Not-for-profit hospitals prepare their cash flows statement in conformity with FASB standards, whereas government hospitals prepare their statement in conformity with GASB standards. The two standards have several differences. The major differences are in the activity classifications in which various cash flows are reported. One example is interest paid and interest received are reported as capital and related financing activities and investing activities in the GASB statement, respectively, but as operating activities in the FASB statement, except for investment income added to restricted net assets which is reported as a financing activity. Acquisitions of property and equipment are reported as capital and related financing activities in the GASB statement but as investing activities in the FASB statements. GASB standards also require that the statement of cash flows be prepared using the direct method, which is optional under FASB standards. Additional differences are explained in Chapter 16 and examples of each statement are provided in Illustrations 16-5 and 16-6. Difficulty: 2 Medium Topic: Reporting and Accounting Issues Learning Objective: 16-02 Explain unique accounting and reporting issues in health care organizations. Bloom's: Understand AACSB: Communication AICPA: FN Reporting

60) Describe what prepaid health care plans are and some of the related accounting issues. Answer: Health maintenance organizations (HMOs) and preferred provider organizations (PPOs) function as brokers between the consumer/patient and health care provider. In general, the employer or person buying into those plans pays a fixed amount per month and is allowed a set of services for which there is no payment, or a relatively small co-pay at the time of service. If the cost of services exceeds revenue that is brought in, then the plan will have a loss. The cost of future services to be rendered, net of anticipated revenue, should be recorded as a liability upon receipt of the monthly premium paid by the consumer/patients/employers. Plans are complex and vary greatly in the contractual arrangements that are drawn up among the parties, so the accounting treatment of each transaction must carefully consider the facts and circumstances of the agreements. Difficulty: 2 Medium Topic: Prepaid health care plans Learning Objective: 16-04 Describe other accounting issues in the health care industry, including legislation, auditing, taxation and regulation, prepaid health care services, and continuing care retirement communities. Bloom's: Understand AACSB: Communication AICPA: FN Reporting 61) What auditing issues are of particular significance to the health care industry? Answer: Auditors must be sure that contingent liabilities (e.g., malpractice lawsuits) are recorded or disclosed as appropriate. Health care providers may receive federal funds and therefore be required to have a single audit following OMB Uniform Guidance. In calculating the threshold expenditures/expenses level of $750,000 to determine if the organization must have a single audit, Medicare and Medicaid reimbursements are not considered. Auditors must assess whether the organization has complied with laws and regulations. In the health care industry, the federal government has enacted legislation to curb fraud and illegal acts, so auditors need be familiar with these laws. There are also tax and other regulatory acts that may affect the audit. Related entities, joint ventures and restructuring are common practices among health care providers, particularly as the cost of health care increases and organizations look for efficiencies in providing services. The degree of control of one organization over the other is an important consideration for an auditor in determining the reporting unit and its component entities and whether those relationships dictate display of information on the face of the statements or disclosure in the notes to the financial statements. Difficulty: 2 Medium Topic: Other health care issues Learning Objective: 16-04 Describe other accounting issues in the health care industry, including legislation, auditing, taxation and regulation, prepaid health care services, and continuing care retirement communities. Bloom's: Understand AACSB: Communication AICPA: BB Industry

62) "The goal of financial and operational analysis for the manager is to determine the creditworthiness of the health care organization." Do you agree with the statement? Why or why not? Answer: Disagree. A manager certainly cares about the ability of the organization to provide for debt service; however, that objective is more likely associated with financial analysts who evaluate the organization in determining whether to invest in its bonds. Managers primarily have an internal focus and analyze finances and operations for the purpose of assessing performance for which they are accountable. Managers are also aware that third-party payors, such as insurance companies and the federal government, analyze the financial and operational performance of the organization in order to determine appropriate payments for service, either retroactively or prospectively. Difficulty: 2 Medium Topic: Financial and operational analysis Learning Objective: 16-05 Explain financial and operational analysis of health care organizations. Bloom's: Understand AACSB: Communication AICPA: BB Industry 63) Explain how one can evaluate both the financial performance of a hospital and the quality of health care the hospital provides. Answer: National organizations such as the Healthcare Financial Management Association (HFMA) publish annual benchmark data for hospital financial indicators. An example of indicators provided by the HFMA is presented in Illustration 16-7. To evaluate the quality of health care provided by a particular hospital, with comparisons to benchmarks for other nearby hospitals or state and national averages, one can obtain the necessary data from Hospital Compare. Hospital Compare provides quality of care information on over 4,000 Medicare certified hospitals. A star rating along with additional quality information is publicly accessible at the Hospital Compare website (https://www.medicare.gov/hospitalcompare/search.html?). This site was created by the Centers for Medicare and Medicaid Services (CMS), the U.S. Department of Health and Human Services, and the Hospital Quality Alliance (HQA), an alliance of numerous national health care and other organizations. Difficulty: 2 Medium Topic: Financial and operational analysis Learning Objective: 16-05 Explain financial and operational analysis of health care organizations. Bloom's: Understand AACSB: Communication AICPA: BB Industry

Accounting for Governmental and Nonprofit Entities, 18e (Reck) Chapter 17 Accounting and Reporting for the Federal Government 1) Responsibility for setting accounting and reporting standards for federal agencies rests primarily with the Federal Accounting Standards Advisory Board. Answer: FALSE Difficulty: 1 Easy Topic: Federal Government Financial Management Structure Learning Objective: 17-01 Describe the financial management structure and the process for establishing generally accepted accounting principles for the federal government. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 2) By law, federal agencies must incorporate the accounting standards (GAAP) established for the federal government into their financial management systems. Answer: TRUE Difficulty: 1 Easy Topic: Federal Government Financial Management Structure Learning Objective: 17-01 Describe the financial management structure and the process for establishing generally accepted accounting principles for the federal government. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 3) The objectives of federal financial reporting are to assist report users in evaluating budgetary integrity, operating performance, stewardship, and adequacy of systems and controls. Answer: TRUE Difficulty: 1 Easy Topic: Conceptual Framework Learning Objective: 17-02 Explain the concepts underlying federal accounting and financial reporting. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

4) Federal departments and agencies should utilize the U.S. Government Standard General Ledger as the account structure for their accounting systems. Answer: TRUE Difficulty: 1 Easy Topic: Federal Government Financial Management Structure Learning Objective: 17-01 Describe the financial management structure and the process for establishing generally accepted accounting principles for the federal government. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 5) Fund balances of a federal agency's various funds are reported in the fund equity section of the agency's balance sheet. Answer: FALSE Difficulty: 2 Medium Topic: Required Financial Reporting—Government Agencies Learning Objective: 17-04 Describe financial reporting requirements for U.S. government-wide Federal agencies Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 6) An expended appropriation occurs when cash has been disbursed to pay for a good or service. Answer: FALSE Difficulty: 1 Easy Topic: Dual-track Accounting System Learning Objective: 17-05 Understand and record budgetary and proprietary journal entries and prepare financial statements for federal agencies. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 7) Unexpended appropriations is the component of net position in a federal agency balance sheet that represents the amount of appropriations still available for obligation, or which has been obligated but not yet expended. Answer: TRUE Difficulty: 1 Easy Topic: Dual-track Accounting System Learning Objective: 17-05 Understand and record budgetary and proprietary journal entries and prepare financial statements for federal agencies. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 2

8) Cumulative results of operations is the component of net position in a federal agency balance sheet that represents the amount of appropriations still available for obligation, or which has been obligated but not yet expended. Answer: FALSE Difficulty: 1 Easy Topic: Dual-track Accounting System Learning Objective: 17-05 Understand and record budgetary and proprietary journal entries and prepare financial statements for federal agencies. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 9) The federal budgetary term "commitment" is synonymous with "appropriations" as used in state and local government terminology. Answer: FALSE Difficulty: 1 Easy Topic: Dual-track Accounting System Learning Objective: 17-05 Understand and record budgetary and proprietary journal entries and prepare financial statements for federal agencies. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 10) The financial statements of the U.S. government are prepared using generally accepted accounting principles promulgated by the Governmental Accounting Standards Board. Answer: FALSE Difficulty: 1 Easy Topic: Generally Accepted Accounting Principles for the Federal Government Learning Objective: 17-01 Describe the financial management structure and the process for establishing generally accepted accounting principles for the federal government. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

11) Federal government agencies prepare a management's discussion and analysis (MD&A) to be included in their general purpose federal financial report. Answer: TRUE Difficulty: 1 Easy Topic: Required Financial Reporting—Government Agencies Learning Objective: 17-04 Describe financial reporting requirements for U.S. government-wide Federal agencies Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 12) Under SFFAC No. 2, all federal agencies are defined as separate reporting entities for financial statement preparation and reporting purposes. Answer: FALSE Difficulty: 1 Easy Topic: Conceptual Framework Learning Objective: 17-02 Explain the concepts underlying federal accounting and financial reporting. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 13) Objectives that are identified by SFFAC No. 1 for federal financial reporting include budgetary integrity, operating performance, transparency, and stewardship. Answer: FALSE Difficulty: 1 Easy Topic: Conceptual Framework Learning Objective: 17-02 Explain the concepts underlying federal accounting and financial reporting. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 14) Heritage assets are defined as beneficial investments of the federal government in items such as nonfederal physical property, human capital, and research and development. Answer: FALSE Difficulty: 1 Easy Topic: Required Financial Reporting—Government Agencies Learning Objective: 17-04 Describe financial reporting requirements for U.S. government-wide Federal agencies Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 4

15) At the present time, the conceptual framework for the federal government and its agencies does not provide definitions of the basic elements of the financial statements. Answer: FALSE Difficulty: 1 Easy Topic: Conceptual Framework Learning Objective: 17-02 Explain the concepts underlying federal accounting and financial reporting. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 16) Similar to state and local governments, the federal government uses funds to demonstrate funds are being used for their intended purposes. Answer: TRUE Difficulty: 2 Medium Topic: Funds Used in Federal Accounting Learning Objective: 17-03 Explain the funds used in federal accounting. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 17) Social Security is an example of a trust fund administered by the federal government. Answer: TRUE Difficulty: 1 Easy Topic: Funds Used in Federal Accounting Learning Objective: 17-03 Explain the funds used in federal accounting. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 18) The purpose of revolving funds of the federal government is similar to that of proprietary funds of state and local governments. Answer: TRUE Difficulty: 1 Easy Topic: Funds Used in Federal Accounting Learning Objective: 17-03 Explain the funds used in federal accounting. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

19) According to FASAB, entity assets are defined as those assets arising from transactions between federal entities. Answer: FALSE Difficulty: 1 Easy Topic: Required Financial Reporting—Government Agencies Learning Objective: 17-04 Describe financial reporting requirements for U.S. government-wide Federal agencies Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 20) An example of a federal government general property, plant, and equipment asset would be Yellowstone National Park. Answer: FALSE Difficulty: 1 Easy Topic: Required Financial Reporting—Government Agencies Learning Objective: 17-04 Describe financial reporting requirements for U.S. government-wide Federal agencies Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 21) Stewardship assets are reported as a classification within the property, plant, and equipment section of the federal balance sheet. Answer: FALSE Difficulty: 1 Easy Topic: Required Financial Reporting—U.S. Government-wide Learning Objective: 17-04 Describe financial reporting requirements for U.S. government-wide Federal agencies Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 22) The fund balances of a federal reporting entity should be separated into unexpended appropriations, restricted appropriations, and cumulative fund balance. Answer: FALSE Difficulty: 1 Easy Topic: Required Financial Reporting—Government Agencies Learning Objective: 17-04 Describe financial reporting requirements for U.S. government-wide Federal agencies Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 6

23) When an appropriation is passed a federal agency would record entries in both the budgetary and the proprietary track accounts. Answer: TRUE Difficulty: 1 Easy Topic: Dual-track Accounting System Learning Objective: 17-05 Understand and record budgetary and proprietary journal entries and prepare financial statements for federal agencies. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 24) A federal agency does not record depreciation expense. Answer: FALSE Difficulty: 1 Easy Topic: Required Financial Reporting—Government Agencies Learning Objective: 17-04 Describe financial reporting requirements for U.S. government-wide Federal agencies Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 25) A federal agency only records entries in the proprietary track accounts for supplies inventory. Answer: TRUE Difficulty: 1 Easy Topic: Dual-track Accounting System Learning Objective: 17-05 Understand and record budgetary and proprietary journal entries and prepare financial statements for federal agencies. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

26) Which of the following is not a fund group used by the federal government? A) General Fund. B) Permanent Fund. C) Special Fund. D) Trust Fund. Answer: B Difficulty: 1 Easy Topic: Funds Used in Federal Accounting Learning Objective: 17-03 Explain the funds used in federal accounting. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 27) Which of the following is not a part of the FASAB due process for establishing a federal financial accounting standard? A) Public comment on a discussion memorandum. B) Issuing an exposure draft. C) Unanimous approval by the FASAB. D) Support (or lack of opposition) of the standard by the three principals (Comptroller General, Secretary of the Treasury, and Director of the Office of Management and Budget). Answer: C Difficulty: 1 Easy Topic: Generally Accepted Accounting Principles for the Federal Government Learning Objective: 17-01 Describe the financial management structure and the process for establishing generally accepted accounting principles for the federal government. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 28) As identified by FASAB, which of the following are major user groups of federal financial reports? A) Congress, executives, program managers, and citizens. B) Congress, executives, citizens, and municipal rating agencies. C) Congress, program managers, foreign governments, and citizens. D) Congress, program managers, bond rating agencies, and political parties. Answer: A Difficulty: 1 Easy Topic: Conceptual Framework Learning Objective: 17-02 Explain the concepts underlying federal accounting and financial reporting. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 8

29) The "net position" of a federal agency may include all of the following components, except: A) Unexpended appropriations. B) Cumulative results of operations. C) Appropriations represented by undelivered orders and unobligated balances. D) Fund balance with U.S. Treasury. Answer: D Difficulty: 1 Easy Topic: Required Financial Reporting—Government Agencies Learning Objective: 17-04 Describe financial reporting requirements for U.S. government-wide Federal agencies Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 30) Which of the following is not an objective identified in FASAB Statement of Accounting and Reporting Concepts No. 1 ? A) To assist report users in evaluating budgetary integrity. B) To assist report users in evaluating the extent to which tax burdens have changed. C) To assist report users in evaluating stewardship. D) To assist report users in evaluating operating performance. Answer: B Difficulty: 1 Easy Topic: Conceptual Framework Learning Objective: 17-02 Explain the concepts underlying federal accounting and financial reporting. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

31) Which of the following statements most accurately describes the dual-track accounting system used in federal agency accounting? A) Recording internal budgetary transactions and proprietary transactions with external parties on a modified accrual basis of accounting. B) Use of double-entry accounting. C) Maintaining self-balancing sets of proprietary and budgetary accounts and recording the effects of transactions on both available budgetary resources and proprietary accounts. D) Keeping separate books, one on a tax basis and the other on a GAAP basis. Answer: C Difficulty: 1 Easy Topic: Dual-track Accounting System Learning Objective: 17-05 Understand and record budgetary and proprietary journal entries and prepare financial statements for federal agencies. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 32) Under federal government accounting, recording the estimated amount of equipment prior to actually placing an order or entering into a contract is called a(an): A) Obligation. B) Apportionment. C) Commitment. D) Allotment. Answer: C Difficulty: 1 Easy Topic: Dual-track Accounting System Learning Objective: 17-05 Understand and record budgetary and proprietary journal entries and prepare financial statements for federal agencies. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

33) A certain federal agency placed an order for office supplies at an estimated cost of $14,400. Later in the same fiscal year these supplies were received at an actual cost of $14,800. Assume commitment accounting is not used by this agency. At the time the order is placed, what is the net effect on the budgetary and proprietary track accounts? A) Budgetary accounts: $14,400; Proprietary accounts: $14,400. B) Budgetary accounts: $14,400; Proprietary accounts: $0. C) Budgetary accounts: $14,400; Proprietary accounts: $14,800. D) Budgetary accounts: $0; Proprietary accounts: $0. Answer: B Difficulty: 3 Hard Topic: Dual-track Accounting System Learning Objective: 17-05 Understand and record budgetary and proprietary journal entries and prepare financial statements for federal agencies. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Measurement 34) A certain federal agency placed an order for office supplies at an estimated cost of $14,400. Later in the same fiscal year these supplies were received at an actual cost of $14,800. Assume commitment accounting is not used by this agency. At the time the order is received, what is the net effect on the budgetary and proprietary track accounts? A) Budgetary Accounts: $14,400; Proprietary Accounts: $14,400. B) Budgetary Accounts: $14,400; Proprietary Accounts: $14,800. C) Budgetary Accounts: $400; Proprietary Accounts: $14,800. D) Budgetary Accounts: $0; Proprietary Accounts: $14,800. Answer: C Difficulty: 3 Hard Topic: Dual-track Accounting System Learning Objective: 17-05 Understand and record budgetary and proprietary journal entries and prepare financial statements for federal agencies. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Measurement

35) Which of the following financial statements is not required by OMB Circular A-136? A) Statement of budgetary resources. B) Statement of cash flows. C) Balance sheet. D) Statement of changes in net position. Answer: B Difficulty: 1 Easy Topic: Required Financial Reporting—Government Agencies Learning Objective: 17-04 Describe financial reporting requirements for U.S. government-wide Federal agencies Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 36) One of the purposes of the Federal Financial Management Improvement Act of 1996 was to: A) Establish a requirement that the financial statements of the federal government as a whole be audited. B) Improve the effectiveness of programs receiving federal funds. C) Establish generally accepted federal accounting principles. D) Rebuild the credibility and restore public confidence in the federal government. Answer: D Difficulty: 1 Easy Topic: Federal Government Financial Management Structure Learning Objective: 17-01 Describe the financial management structure and the process for establishing generally accepted accounting principles for the federal government. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 37) Which of the following officials has shared responsibility under federal law for establishing and maintaining a sound financial structure for the federal government? A) Chief Financial Officer of the Congressional Budget Office. B) Chair of the Governmental Accounting Standards Board. C) Secretary of the Treasury. D) Chair of the Federal Accounting Standards Advisory Board. Answer: C Difficulty: 1 Easy Topic: Federal Government Financial Management Structure Learning Objective: 17-01 Describe the financial management structure and the process for establishing generally accepted accounting principles for the federal government. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 12

38) The Comptroller General of the United States is the head of the: A) Office of the Management and Budget. B) Government Accountability Office. C) Congressional Budget Office. D) Federal Accounting Standards Advisory Board. Answer: B Difficulty: 1 Easy Topic: Federal Government Financial Management Structure Learning Objective: 17-01 Describe the financial management structure and the process for establishing generally accepted accounting principles for the federal government. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 39) Where would federal agencies report information concerning their performance goals and performance results, along with their future challenges? A) Other accompanying information. B) Required supplemental information. C) Management discussion and analysis. D) Notes to the financial statements. Answer: C Difficulty: 1 Easy Topic: Required Financial Reporting—Government Agencies Learning Objective: 17-04 Describe financial reporting requirements for U.S. government-wide Federal agencies Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 40) As described in Statement of Federal Financial Accounting Concepts (SFFAC) No. 2 "Entity and Display," which of the following is an accurate list of the three perspectives from which the federal government can be viewed? A) Function, department, and program. B) Organization, budget, and program. C) Budget, program, and line-item. D) Fund, activity, and account. Answer: B Difficulty: 1 Easy Topic: Conceptual Framework Learning Objective: 17-02 Explain the concepts underlying federal accounting and financial reporting. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 13

41) The management's discussion and analysis (MD&A) required in general purpose federal financial reporting is different than that required by GASB of state and local governments in that: A) It includes information about the agency's performance goals and results in addition to financial activities. B) It is outside the general purpose federal financial report and is optional, not required. C) It is a part of the basic financial statements and, as a result, it is audited along with the financial statements. D) There are no significant differences. Answer: A Difficulty: 2 Medium Topic: Required Financial Reporting—Government Agencies Learning Objective: 17-04 Describe financial reporting requirements for U.S. government-wide Federal agencies Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting 42) Which of the following federal financial statements relies primarily on the use of actuarial assumptions and long-range projections for the information reported on the statement? A) Balance sheet. B) Statement of social insurance. C) Statement of custodial activity. D) Statement of fiduciary net assets. Answer: B Difficulty: 2 Medium Topic: Required Financial Reporting—Government Agencies Learning Objective: 17-04 Describe financial reporting requirements for U.S. government-wide Federal agencies Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

43) Which of the following describes the usual flow of budgetary authority through the budgetary accounts of a federal agency? A) Apportionment, allotment, appropriation, commitment, obligation, expended appropriation. B) Allotment, commitment, obligation, expended appropriation, apportionment. C) Appropriation, apportionment, allotment, commitment, obligation, expended appropriation. D) Commitment, obligation, appropriation, apportionment, allotment, expended appropriation. Answer: C Difficulty: 1 Easy Topic: Dual-track Accounting System Learning Objective: 17-05 Understand and record budgetary and proprietary journal entries and prepare financial statements for federal agencies. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 44) Which of the following statements is not true about the United States government-wide financial report? A) Since 1997, the financial statements of the U.S. government as a whole have been audited by the GAO. B) The majority of the 24 major federal agencies required to be audited have received unmodified audit opinions by the GAO. C) The Comptroller General of the United States has rendered a disclaimer of opinion on the U.S. Government's consolidated financial statements for as long as that office has audited these statements. D) The federal government received an unmodified opinion from the GAO on the most recent financial statements of the U.S. government as a whole. Answer: D Difficulty: 2 Medium Topic: Required Financial Reporting—U.S. Government-wide Learning Objective: 17-04 Describe financial reporting requirements for U.S. government-wide Federal agencies Bloom's: Understand AACSB: Knowledge Application AICPA: BB Industry

45) Which of the following is required by OMB Circular A-136 in the basic financial statements? A) Statement of changes in net position. B) Statement of net assets. C) Statement of revenues, expenditures, and changes in fund balances. D) Statement of financing. Answer: A Difficulty: 1 Easy Topic: Required Financial Reporting—Government Agencies Learning Objective: 17-04 Describe financial reporting requirements for U.S. government-wide Federal agencies Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting 46) Which of the following is an example of a stewardship asset? A) The Treasury Building. B) The Lincoln Memorial. C) The George Washington Bridge. D) A stealth fighter jet. Answer: B Difficulty: 2 Medium Topic: Required Financial Reporting—Government Agencies Learning Objective: 17-04 Describe financial reporting requirements for U.S. government-wide Federal agencies Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

47) A federal agency issued $1,000 in purchase orders for goods and services. How would this transaction be recorded? A) In the budgetary track debit Commitments $1,000, and credit Undelivered Orders $1,000. B) In the proprietary track debit Operating Materials and Supplies $1,000, and credit Undelivered Orders $1,000. C) In the budgetary track debit Unapportioned Authority $1,000, and credit Undelivered Orders $1,000. D) In the budgetary track debit Commitments $1,000, and credit Undelivered Orders $1,000; in the proprietary track debit Estimated Operating Materials and Supplies $1,000, and credit Undelivered Orders $1,000. Answer: A Difficulty: 3 Hard Topic: Dual-track Accounting System Learning Objective: 17-05 Understand and record budgetary and proprietary journal entries and prepare financial statements for federal agencies. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Measurement 48) A federal agency received $900,000 as its annual appropriation from Congress. How would the appropriation be recorded by the agency? A) In the budgetary track debit Fund Balance with Treasury $900,000, and credit Unapportioned Authority $900,000; in the proprietary track debit Other Appropriations Realized $900,000, and credit Unexpended Appropriations $900,000. B) In the budgetary track debit Other Appropriations Realized $900,000, and credit Unexpended Appropriations; in the proprietary track debit Fund Balance with Treasury $900,000, and credit Unapportioned Authority $900.000. C) In the budgetary track debit Other Appropriations Realized $900,000, and credit Unapportioned Authority $900,000. In the proprietary track no entry is recorded since the transaction involves the budget. D) In the budgetary track debit Other Appropriations Realized $900,000, and credit Unapportioned Authority $900,000; in the proprietary track debit Fund Balance with Treasury, and credit Unexpended Appropriations. Answer: D Difficulty: 3 Hard Topic: Dual-track Accounting System Learning Objective: 17-05 Understand and record budgetary and proprietary journal entries and prepare financial statements for federal agencies. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Measurement

49) A federal agency recorded the receipt of supplies at an actual cost of $57,000. At the time the purchase orders were issued it was estimated the supplies would cost $56,000. How would this transaction be recorded in the budgetary track accounts? A) It would not be recorded in the budgetary track; it would only be recorded in the proprietary track. B) Debit Undelivered Orders $57,000 and credit Expended Authority $57,000. C) Debit Undelivered Orders $56,000, debit Allotments $1,000, and credit Expended Authority $57,000. D) Debit Undelivered Orders $57,000, credit Allotments $1,000, and credit Expended Authority $56,000. Answer: C Difficulty: 3 Hard Topic: Dual-track Accounting System Learning Objective: 17-05 Understand and record budgetary and proprietary journal entries and prepare financial statements for federal agencies. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Measurement 50) A federal agency recorded the receipt of supplies at an actual cost of $57,000. At the time the purchase orders were issued it was estimated the supplies would cost $56,000. How would this transaction be recorded in the proprietary track accounts? A) It would not be recorded in the proprietary track; it would only be recorded in the budgetary track. B) Debit Operating Materials and Supplies $57,000 and credit Accounts Payable $57,000. C) Debit Unexpended Appropriations $57,000 and credit Appropriations Used $57,000. D) Debit Operating Materials and Supplies $57,000 and Unexpended Appropriations $57,000; credit Accounts Payable $57,000 and Appropriations Used $57,000. Answer: D Difficulty: 3 Hard Topic: Dual-track Accounting System Learning Objective: 17-05 Understand and record budgetary and proprietary journal entries and prepare financial statements for federal agencies. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Measurement

51) Which of the following federal government fund groups is most similar to a state and local government custodial fund? A) Deposit Fund. B) General Fund. C) Special Fund. D) Trust Fund. Answer: A Difficulty: 1 Easy Topic: Funds Used in Federal Accounting Learning Objective: 17-03 Explain the funds used in federal accounting. Bloom's: Remember AACSB: Knowledge Application AICPA: FN Reporting

52) For each of the following definitions, indicate the key term from the list that best matches by placing the appropriate definition. A. Apportionment B. Budgetary resources C. Expended appropriation D. Governmental assets E. Heritage assets F. Intragovernmental assets G. Stewardship investments H. Stewardship land 1. Federal capital assets that possess educational, cultural, or natural characteristics 2. Claims by or against a reporting entity that arise from transactions between the entity and other reporting entities 3. Assets that arise from transactions of the federal government or an entity of the federal government with nonfederal entities 4. Dividing a federal appropriation into amounts that are available during specific periods 5. Federal land other than that included in general property, plant, and equipment 6. New budgetary authority for the period plus unobligated budgetary authority carried over from the prior period and offsetting collections, if any, plus or minus any budgetary adjustments 7. An account used when the goods or services have been received Answer: 1. E, 2. F, 3. D, 4. A, 5. H, 6. B, 7. C Explanation: No further explanation details are available for this problem. Difficulty: 2 Medium Topic: Dual-track Accounting System; Required Financial Reporting—Government Agencies Learning Objective: 17-04 Describe financial reporting requirements for U.S. government-wide Federal agencies; 17-05 Understand and record budgetary and proprietary journal entries and prepare financial statements for federal agencies. Bloom's: Understand AACSB: Knowledge Application AICPA: FN Reporting

53) The Federal Monuments Commission began operations on October 1, 2020. Prepare journal form all entries that should be made in budgetary and proprietary accounts of the agency. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) 1. The Congress passed, and the President signed, a one-year appropriation for fiscal year 2021 for the Monuments Commission in the amount of $30,000,000. 2. The OMB notified the agency of the following apportionments of the 2021 appropriation: first quarter, $8,000,000; second quarter, $8,000,000; third quarter, $7,000,000; and fourth quarter, $7,000,000. 3. The Commission Director allotted $1,500,000 for the operations of October 2020. 4. Commitments for goods and services not yet ordered or received were recorded in the amount of $1,300,000. 5. Purchase orders and contracts for services were recorded for the month of October 2020 in the amount of $1,250,000. Answer:

Explanation: No further explanation details are available for this problem. Difficulty: 3 Hard Topic: Dual-track Accounting System Learning Objective: 17-05 Understand and record budgetary and proprietary journal entries and prepare financial statements for federal agencies. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Measurement 21

54) Compute the missing amount in the following list of proprietary accounts of a federal government agency. Proprietary Accounts: Accounts Payable Operating/Program Expenses Accumulated Depreciation-Plant and Equipment Cumulative Results of Operations 10/1/2019 Appropriations Used—2020 Fund Balance with Treasury—2020 Accounts Receivable Operating Materials and Supplies Plant and Equipment Unexpended Appropriations—2020

1,200,000 12,400,000 9,200,000 ? 12,400,000 4,800,000 200,000 3,200,000 30,000,000 3,600,000

Answer:

55) The Desert Conservation Agency was authorized by the United States Congress to commence operations on October 1, 2020. Record the following transactions in general journal form, as they should appear in the budgetary and proprietary accounts of the agency. For each entry indicate whether it affects the budgetary accounts or the proprietary accounts. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.) 1. The agency received official notice that its one-year appropriation passed by the Congress and signed by the President amounted to $350 million for operating expenses for the fiscal year and $100 million for acquisition of capital assets during the year. 2. The Office of Management and Budget notified the agency that the entire appropriation had been apportioned. 3. The head of the agency allotted $75 million for the first quarter's operating expenses, and $25 million for equipment to be ordered during the first quarter. 4. Purchase orders and contracts for services recorded for the first quarter totaled $90 million (the agency does not record commitments prior to placing orders or entering into contracts). 5. Total expenditures for the first quarter amounted to $70 million for operating expenses and $18 million for equipment, for which an obligation in the amount of $84 million had been previously recorded (see item 4 above). The expenditures were all paid from fund balance with U.S. Treasury.

Answer:

Difficulty: 3 Hard Topic: Dual-track Accounting System Learning Objective: 17-05 Understand and record budgetary and proprietary journal entries and prepare financial statements for federal agencies. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Measurement

56) Explain the "dual-track" accounting system used by federal agencies and why it is needed. Answer: Federal government agencies' accounting systems are intended to facilitate the collection of information on the cost of agency activities to facilitate agency management as well as providing evidence of adherence to legal budgetary requirements. As illustrated in Chapter 17, federal agency accounting systems utilize a "dual-track" system—a proprietary track to provide information for agency management and a budgetary track to (1) ensure that available budgetary resources and authority are not overexpended or overobligated, and (2) to facilitate standardized budgetary reporting requirements. Difficulty: 2 Medium Topic: Dual-track Accounting System Learning Objective: 17-05 Understand and record budgetary and proprietary journal entries and prepare financial statements for federal agencies. Bloom's: Understand AACSB: Communication AICPA: FN Reporting 57) Explain the components of net position. Answer: Net position is the term used to describe the aggregate of the net assets of all an agency's funds. It consists of two components: unexpended appropriations and cumulative results of operations. Unexpended appropriations is the amount of the entity's appropriations represented by undelivered orders and unobligated balances. Cumulative results of operations are the net differences between expenses/losses and financing sources, including appropriations, revenues, and gains, since the inception of the activity, as well as the fair market value of donated assets and assets (net of liabilities) transferred to or from other federal entities without reimbursement. Difficulty: 2 Medium Topic: Dual-track Accounting System Learning Objective: 17-05 Understand and record budgetary and proprietary journal entries and prepare financial statements for federal agencies. Bloom's: Understand AACSB: Communication AICPA: FN Reporting

58) Explain the GAAP hierarchy used by federal government agencies. Answer: SFFAS No. 34 "The Hierarchy of Generally Accepted Accounting Principles, Including the Application of Standards Issued by the Financial Accounting Standards Board" establishes the following hierarchy of GAAP for the federal government: (a) FASAB statements and interpretations (SFFASs) (b) FASAB technical bulletins, AICPA industry audit and accounting guides applicable to federal entities that are cleared by FASAB (c) Technical releases of the FASAB Accounting and Auditing Policy Committee (d) FASAB implementation guides and practices that are widely recognized and prevalent in the federal government Difficulty: 2 Medium Topic: Generally Accepted Accounting Principles for the Federal Government Learning Objective: 17-01 Describe the financial management structure and the process for establishing generally accepted accounting principles for the federal government. Bloom's: Understand AACSB: Communication AICPA: FN Reporting 59) "Each federal government agency should maintain a General Fund and as many other funds defined by the GASB as are appropriate." Do you agree? Why or why not? Answer: Disagree. The FASAB, not the GASB, has authority to establish GAAP for federal agencies as indicated by SFFAS No. 34 on the GAAP hierarchy and through recognition of the FASAB as the GAAP authority by the AICPA. There is only one General Fund for the entire federal government; each agency that is financed by the general taxing and revenue powers and general borrowings of the federal government operates a "general fund" which is, in reality, a subdivision of the federal General Fund. The JFMIP "principals" now have joint statutory duty to establish federal financial reporting standards by publishing standards recommended to them by the FASAB. Difficulty: 2 Medium Topic: Generally Accepted Accounting Principles for the Federal Government Learning Objective: 17-01 Describe the financial management structure and the process for establishing generally accepted accounting principles for the federal government. Bloom's: Understand AACSB: Communication AICPA: FN Reporting

60) Describe the budgetary accounts used in federal agency accounting and the flow of budgetary authority through those accounts. Answer: The budgetary accounts illustrated in Chapter 17 are appropriations, apportionments, allotments, commitments, obligations, and expended appropriations. As shown in Illustration 17-11 and illustrative transactions 1 through 15 in Chapter 17, the budgetary authority flows through the accounts in the sequence given above as the OMB notifies the agency of its approved appropriation, OMB apportions it to the agency, the agency head allots it within the agency, pre-order commitments are recorded, orders are placed, and goods are received. Difficulty: 2 Medium Topic: Dual-track Accounting System Learning Objective: 17-05 Understand and record budgetary and proprietary journal entries and prepare financial statements for federal agencies. Bloom's: Understand AACSB: Communication AICPA: FN Reporting 61) Identify the office, officer, or department of the United States federal government that is responsible for each of the following: A. Appropriations. B. Apportionments. C. Allotments. D. Obligations. Answer: Identification of key federal responsible officials. A. The Congress. B. The Office of Management and Budget. C. The agency head. D. The head of each department (program, activity, etc.) within an agency. Difficulty: 2 Medium Topic: Dual-track Accounting System Learning Objective: 17-05 Understand and record budgetary and proprietary journal entries and prepare financial statements for federal agencies. Bloom's: Understand AACSB: Communication AICPA: FN Reporting

62) Explain the process of financial reporting of the U.S. Government as a whole. Does the federal government receive an unmodified audit opinion on its financial report? Answer: Starting in fiscal year 1997, consolidated financial statements of the U.S. Government and its 24 largest agencies (the CFO Act agencies) have been produced by the Financial Management Service of the Department of Treasury. They are audited by the Government Accountability Office (GAO). To date, most of the agencies have received unmodified audit opinions; however, the GAO has disclaimed an opinion on the government-wide statements. Difficulty: 2 Medium Topic: Required Financial Reporting—U.S. Government-wide Learning Objective: 17-04 Describe financial reporting requirements for U.S. government-wide Federal agencies Bloom's: Understand AACSB: Communication AICPA: FN Reporting 63) Describe the purpose of a management's discussion and analysis (MD&A) in the general purpose federal financial report of a federal agency. Answer: The management's discussion and analysis (MD&A) is an important vehicle for (1) communicating managers' insights about the reporting entity, (2) increasing the understandability and usefulness of the general purpose federal financial report, and (3) providing accessible information about the entity and its operations, service levels, successes, challenges, and future. Difficulty: 2 Medium Topic: Required Financial Reporting—Government Agencies Learning Objective: 17-04 Describe financial reporting requirements for U.S. government-wide Federal agencies Bloom's: Understand AACSB: Communication AICPA: FN Reporting 64) What is the difference between entity assets and nonentity assets? Answer: Entity assets are those the reporting entity has authority to use in its operations. Nonentity assets are those held by the entity but which are not available for the entity to spend; for example, federal income taxes collected by the Internal Revenue Service for the U.S. government. Difficulty: 2 Medium Topic: Required Financial Reporting—Government Agencies Learning Objective: 17-04 Describe financial reporting requirements for U.S. government-wide Federal agencies Bloom's: Understand AACSB: Communication AICPA: FN Reporting

65) Describe accounting for federal social insurance programs. Comment on the adequacy of current accounting standards in this area. Answer: SFFAS No. 17 (as amended by SSFAS No. 37) provides guidance for reporting the liability for payments to recipients under the Social Security, Medicare, Railroad Retirement, Black Lung, and Unemployment Insurance programs. In general, a liability (and expense) is recognized when payments are due and payable. Supplementary stewardship information is required. SFFAS No. 25 requires that all of these federal programs, except Unemployment Insurance, must present a Statement of Social Insurance (SOSI). The SOSI will present (1) the actuarial present value for the projection period of all future contributions and tax income received from or on behalf of current and future participants, (2) the actuarial present value for the projection period of estimated future scheduled expenditures paid to or on behalf of current and future participants, and (3) the actuarial present value for the projection period of the estimated future excess of contributions and tax income over future scheduled expenditures. Although these two statements of federal financial accounting standards have improved reporting for social insurance programs, this is a very complex area and there is still work to be done. Difficulty: 2 Medium Topic: Required Financial Reporting—Government Agencies Learning Objective: 17-04 Describe financial reporting requirements for U.S. government-wide Federal agencies Bloom's: Understand AACSB: Communication AICPA: FN Reporting 66) What is a Performance and Accountability Report (PAR)? Describe its purpose and contents. Answer: A PAR is a consolidated report prepared by federal agencies each year that includes (1) the annual performance report required by the Government Performance and Results Act (GPRA) of 1994, (2) the annual financial report, (3) management reports on internal control and other accountability issues, and (4) the other accompanying information. Agencies can issue a PAR or separately issue the annual performance report and the annual financial report. Difficulty: 2 Medium Topic: Required Financial Reporting—Government Agencies Learning Objective: 17-04 Describe financial reporting requirements for U.S. government-wide Federal agencies Bloom's: Understand AACSB: Communication AICPA: FN Reporting