Test bank of Accounting for governmental and nonprofit entities, 14e chapter 7 to chapter 10

Ch7-10
Student: ___________________________________________________________________________

1.

Internal service funds of one government may not provide goods or services, on a cost-reimbursement
basis, to other governments.
True

2.

Revenues of internal service funds should be recognized only when they are expected to be collected in
time to pay current liabilities of the fund.
True

3.

False

Internal service funds account for any long-term liabilities to be serviced from revenue derived from
fund operations.
True

6.

False

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.
True

5.

False

Internal service funds should account for operating expenditures on the full accrual basis.
True

4.

False

False

The fund equity of an internal service fund consists of contributed equity and reserves for assets that will
not be converted into cash in the normal operation of the fund.
True

False

Cash: 350,000
Inventory of Supplies: 38,700
Interfund Loan from Electric Utility Fund: 320,000
Interfund Transfer In from General Fund: 89,200
7.

In the entry above the account "Interfund Loan from Electric Utility Fund" is credited for $320,000
because this amount was loaned by the electric utility fund to the supplies fund and will have to be
repaid by the supplies fund.
True

8.

In the information above the account "Interfund Transfer In from General Fund" is credited for $89,200
because this is the amount of assets that was transferred from the General Fund to the supplies fund as a
contribution.
True

9.

False

False

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.
True

False

1


10. Proprietary funds are accounted for in a manner similar to investor-owned businesses: among other
features, the full accrual basis is used and all of the capital assets used in fund operations are accounted
for by the using fund.
True

False

11. The Encumbrances account should be used by an internal service fund in the same manner as by the

General Fund.
True

False

12. If an internal service fund is created to improve the management of resources devoted to the supply
function, the supplies fund should use periodic inventory accounting instead of perpetual physical
inventory accounting.
True

False

13. Capital assets acquired under a capital lease for use by an internal service fund should be recorded in the
General Fund in order to report all leased assets in one financial statement.
True

False

14. A statement of revenues, expenses, and changes in net assets for an internal service fund is similar in
many respects to an income statement prepared for an investor-owned business.
True

False

15. A statement of cash flows is not prepared for an internal service fund.
True

False

16. An internal service fund can be liquidated only if a ready and willing buyer for the fund's assets exists.

True

False

17. Public utilities owned and operated by governments are the most common examples of enterprise
funds.
True

False

18. Enterprise funds are used by state and local governments to account for services that are provided to the
general public on a user-charge basis, or to account for any services that the governing body of the
government has decided should be accounted for on a "business basis."
True

False

19. Budgets for enterprise funds should be recorded in the accounts in the same manner as budgets for a
General Fund or a special revenue fund.
True

False

20. Unbilled customer accounts receivable should be reflected in the balance sheet of a governmentally
owned utility even though the exact amount of service to be billed is unknown until the customers'
meters can be read.
True

False

2


21. The liability for utility revenue bonds should be reported in business-type activities on the
government-wide statements, but not in the enterprise fund.
True

False

22. General obligation bonds used to increase the capacity of a water treatment plant (part of a water utility
enterprise fund), but for which the debt service (including repayment of principal) will be paid from
general government revenues should be reported as a long-term liability in the water utility fund balance
sheet.
True

False

23. Matured interest and principal on revenue bonds should be recorded in a debt service fund until paid.
True

False

24. Utility enterprise funds that report to regulatory agencies often capitalize both actual interest paid on
debt incurred for construction of plant assets and an imputed amount on their own funds so used.
True

False

25. In the context of regulatory utility plant accounting, original cost and historical cost have the same
meaning.

True

False

26. 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.
True

False

27. The balance sheet format recommended by the NARUC and FERC for utilities subject to regulatory
reporting requirements shows Utility Plant before Current and Accrued Assets and Long-Term Debt
before Current and Accrued Liabilities.
True

False

28. To facilitate the combination of utility financial statements with the statements of other enterprise funds,
GAAP permits utilities to follow the customary format used by nonutility business organizations.
True

False

29. The liability for tax-supported long-term debt issued to provide financing for an enterprise fund and to
be serviced from revenues of the enterprise fund should be reported in the financial statements of the
enterprise fund.
True

False

30. Premium or discount on bonds payable issued by enterprise funds should not be accounted for in the
same manner as premium or discount on tax supported bonds payable reported at the government-wide
level.
True

False

31. Plant and equipment utilized by a governmentally owned utility should be depreciated in the same
manner as if it belonged to an investor-owned utility.
True

False

3


32. Which of the following may properly be reported as a component of equity in the proprietary fund
statement of net assets?
A. Retained earnings.
B. Designated equity.
C. Restricted net assets.
D. Contributed capital.
33. Internal service funds should be used only if
A. The reporting government is the predominant participant in the activity.
B. The reporting government provides services primarily to external participants.
C. Either A and B.
D. Neither A nor B.
34. Which of the following funds of a government uses the same basis of accounting as an enterprise fund?
A. Permanent trust.

B. Investment trust fund.
C. Special revenue.
D. Capital projects.
35. In which of the following funds is it appropriate to record depreciation of capital assets?
A. Enterprise fund.
B. Permanent fund.
C. General fund.
D. Capital projects fund.
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 identity of those who benefit from the fund's service.
C. The number of basic financial statements required.
D. The measurement focus on economic resources for enterprise funds and current financial resources
for internal service funds.
37. Depreciation on capital assets used by an enterprise fund of a government
A. Should not be recorded for infrastructure assets.
B. Should be recorded in the General Fund as an expenditure.
C. Should be recorded in the enterprise fund by a debit to an expense account.
D. Should be recorded in the governmental activities accounts.
38. Which of the following is not true regarding proprietary funds?
A. The difference between assets and liabilities of proprietary funds is called "fund balance."
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 report a statement of cash flows.
39. The comprehensive annual financial report (CAFR) of a government should contain a statement of
revenues, expenses, and changes in net assets for
A. Both proprietary and governmental funds.
B. Proprietary but not governmental funds.
C. Governmental but not proprietary funds.
D. Neither governmental nor proprietary funds.

4


40. 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 golf course.
D. Risk management.
41. Which of the following is (are) an appropriate basis of accounting for an internal service fund?
A. Modified accrual basis: No; Full accrual basis: Yes
B. Modified accrual basis: No; Full accrual basis: No
C. Modified accrual basis: Yes; Full accrual basis: No
D. Modified accrual basis: Yes; Full accrual basis: Yes
42. Which of the following funds of a government would account for depreciation in the accounts of the
fund?
A. General.
B. Internal service.
C. Capital projects.
D. Special revenue.
43. An internal service fund normally uses which of the following budgetary accounts?
A. Estimated Revenues.
B. Appropriations.
C. Encumbrances.
D. None of the above.
44. In order to conform to GASB standards, goods and services provided by internal service funds to other
departments of the government must be priced to
A. Cover variable costs only.
B. Cover full costs (both fixed and variable).

C. Cover full costs, plus an additional charge to cover inflation and anticipated needs for expansion.
D. None of the above. Each government determines its own operating and pricing policies, which may
include subsidizing the cost of operating an internal service fund.
45. An internal service fund should prepare, in conformity with GAAP, all of the following financial
statements except for a
A. Statement of revenues, expenditures, and changes in fund balance.
B. Statement of revenues, expenses, and changes in net assets.
C. Statement of net assets.
D. Statement of cash flows.

5


46. What amount should be accounted for in an internal service fund?
A. $ 350,000.
B. $2,100,000.
C. $1,760,000.
D. $1,640,000.
47. What amount should be accounted for in an enterprise fund?
A. $ 350,000.
B. $2,100,000.
C. $1,760,000.
D. $1,640,000.
48. To establish a new internal service fund 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.
49. GASB accounting and financial reporting standards for risk financing activities provide that an internal

service fund should recognize claims expense and a related liability when a claim has been asserted and
A. It is reasonably possible that a loss has been incurred and the amount can be reasonably estimated.
B. It is probable that a loss has been incurred and the amount can be reasonably estimated.
C. A loss has been incurred, but the amount cannot be reasonably estimated.
D. A municipal court has awarded a judgment to a claimant fund (e.g., the General Fund).
50. 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.

6


51. 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.
B. Private-purpose trust fund.
C. Enterprise.
D. Special revenue.
52. Which of the following is a feasible means of dissolving an internal service fund that the government no
longer needs or wants?
A. Conversion of the fund's noncash assets to cash and distribution of the cash to another fund or funds.
B. Transfer the fund's assets to another fund that will continue the same or similar operating activities.
C. Distribute the fund's assets in kind to another fund or funds that will not continue the same or similar
operating activities.
D. Any of the above, in any combination, would be feasible.
53. Which of the following organizations or units would least likely be accounted for by an enterprise
fund?

A. A hospital.
B. An airport.
C. The health department.
D. A sports stadium.
54. Which of the following accounts would be included in the Fund Equity section of an enterprise fund
balance sheet?
A. Fund Balance: Yes: Net Assets: Yes
B. Fund Balance: Yes; Net Assets: No
C. Fund Balance: No; Net Assets: No
D. Fund Balance: No; Net Assets: Yes
55. The water utility fund of the City of Houghton uses cycle billing procedures. Under these procedures,
the City of Houghton will likely do which of the following on December 31, the end of its fiscal year
A. Read meters and bill all customers on December 31.
B. Accrue revenue and a receivable for the number of days from the last billing date for each customer
until December 31.
C. Ignore water power consumed by customers from their last billing date until December 31.
D. Any of the above are acceptable under GAAP.
56. Which of the following is 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. All of the above are true statements.
57. 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. Material enterprise fund capital assets.
B. Material enterprise fund operating income or loss.
C. Material enterprise fund tax revenues.

D. Material intergovernmental operating subsidies to an enterprise fund.

7


58. A municipal solid waste landfill (MSWLF) accounted for by an enterprise fund should recognize an
expense and liability for the year in the amount of
A. The estimated total current costs for closure and postclosure of the MSWLF determined at the time
the landfill is placed into initial operation divided by the estimated number of years the landfill will
be operated.
B. The estimated total current costs for closure and postclosure of the MSWLF as reevaluated at the end
of each fiscal year divided by the remaining estimated number of years the landfill will be operated.
C. A portion of the estimated total current costs for closure and postclosure of the MSWLF, determined
at the time the landfill is placed into initial operation, equal to the ratio of landfill used during the
year to its total capacity.
D. A portion of the estimated total current costs for closure and postclosure of the MSWLF, as
reevaluated at the end of the fiscal year, equal to the ratio of landfill used to its total capacity.
59. 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.
60. The following cash transactions were among those reported by Crawford County's Water and Sewer
Enterprise Fund for the year:
Proceeds from sale of revenue bonds for construction: $5,000,000
Cash received from customers: $3,000,000

Capital contributed by developers: $1,000,000
In the Water and Sewer 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. $9,000,000.
B. $8,000,000.
C. $6,000,000.
D. $5,000,000.
61. Sales revenues of a utility for a certain fiscal period
A. Are equivalent to total debits to Customer Accounts Receivable for that period.
B. Include receivables billed during a fiscal period, plus receivables billed early in the next year if
meters were read before year-end.
C. Should be reported on the cash basis for the sake of conservatism.
D. Include billed receivables and an accrual for unbilled receivables as of the balance sheet date.
62. 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 enterprise fund and disclosed in the notes to the financial statements.
C. An enterprise fund and the business-like activities accounts.
D. The governmental activities accounts.

8


63. For which of the following assets can the "modified approach" be elected in lieu of depreciation?
A. Eligible infrastructure assets.
B. All general capital assets.
C. Buildings and equipment.
D. All capital assets.
64. The Central Purchasing Fund of Gotham City, an internal service fund, purchased new furniture for use
in the warehouse manager's office. The debit for the entry to record the event should be to

A. Expenditures.
B. Purchases.
C. Furniture and fixtures.
D. General capital assets.
65. Which of the following accounts would least likely be found in the general ledger of an internal service
fund?
A. Cash.
B. Expenditures.
C. Billings to Departments.
D. Machinery and equipment.
66. Which of the following would be reflected in the operating statement of a proprietary fund?
A. Issuance of debt.
B. Repayment of the principal of debt.
C. Purchase of a capital asset.
D. Incurrence of interest expense.
67. How should internal service funds be incorporated into the government-wide financial statements?
A. As part of governmental activities.
B. As part of business-type activities.
C. A or B, but normally A.
D. A or B, but normally B.
68. The operating statement of a proprietary fund should answer which of the following questions?
A. What are the transactions or events of the period that have increased or decreased the resources
available for spending in the near future?
B. Have current financial resources increased or decreased during the period?
C. Have cash balances increased or decreased as a result of transactions and events of the period?
D. What are the transactions or events of the period that have increased or decreased the fund's total
economic resources?
69. Most citizens and financial statement users do not have a clear understanding of the financial reporting
entity whose financial position, results of operations, and cash flows are included in an annual financial
report.

True

False

70. State and local governments should prepare only those financial reports required by law--generally
year-end financial statements.
True

False

9


71. Comprehensive annual financial reports of state and local governments should include (1) an
introductory section, (2) a financial section, and (3) a supplemental section.
True

False

72. The MD&A should provide information that is prospective in nature.
True

False

73. Statistical tables included in comprehensive annual financial reports should include only financial data
needed to support information given in the financial statements.
True

False

74. A component unit is dependent on the primary government when the primary government is obligated
for its debt.
True

False

75. 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.
True

False

76. Under GASBS 34, the financial statements that report on business-type activities at the government-wide
level include the statement of net assets, statement of activities, and statement of cash flows.
True

False

77. GASBS 34 reporting requires combined financial statements as part of the comprehensive annual
financial reports.
True

False

78. Fiduciary activities are not reported in the government-wide financial statements under GASBS 34.
True

False

79. Other comprehensive bases of accounting (OCBOA) are considered generally accepted accounting

principles (GAAP) for state and local governments.
True

False

80. In converting from the modified accrual basis of accounting information in a governmental fund to
accrual basis for the government-wide statements, capital assets acquired by a governmental fund are
deducted from fund balance--governmental funds to arrive at net assets of governmental activities.
True

False

81. In preparation of government-wide statements, converting information recorded using the modified
accrual basis of accounting to the accrual basis, where appropriate, is conceptually desirable.
True

False

82. GASB reporting objectives emphasize the role of accountability in external financial reporting, and
describe accountability as the "paramount objective from which all other objectives must flow."
True

False

10


83. One of the required reconciliations in converting governmental fund financial statements to
governmental activities statements at the government-wide level is to adjust for internal service funds'
assets, liabilities, operating income (loss), and transfers.

True

False

84. What is the objective of financial reporting by state and local governments?
A. The same as the objectives of financial reporting by business enterprises.
B. To report on the legal requirements imposed on the government by its elected officials.
C. To assist governments to discharge their duty to be publicly accountable in a democratic society.
D. To fulfill the government's statutory duty to report on cash received and cash disbursed.
85. A component unit is dependent on the primary government when the
A. Primary government is entitled to its resources.
B. Primary government is obligated to provide financial support.
C. Primary government is obligated for its debt.
D. All of the above.
86. Which of the following circumstances would indicate that a potential component unit (PCU) should be
included as part of the governmental financial reporting entity?
A. The primary government does not approve the operating budget of the potential component unit.
B. Officials of the primary government appoint a majority of the members of the governing board of the
PCU.
C. The PCU has sufficient operational and financial dependence that the primary government can
impose its will on the PCU.
D. Both B and C occurring together indicate that the PCU should be included in the reporting entity.
87. Which of the following best describes the current state of financial reporting for state and local
governments?
A. Required comprehensive annual financial reports for all public entities.
B. Focus on individual funds.
C. Cash basis accounting.
D. Integration of government-wide financial reporting and fund accounting.
88. Combining financial statements for nonmajor funds of a government should be included in
A. The basic financial statements.

B. The notes to the financial statements.
C. A comprehensive annual financial report (CAFR).
D. Any of the above is acceptable under generally accepted accounting principles (GAAP).
89. Which of the following would not be included within the financial section of the comprehensive annual
financial report (CAFR)?
A. Management's discussion and analysis (MD&A).
B. Management's letter of transmittal.
C. Independent auditor's report.
D. Required supplementary information (RSI).
90. What is the paramount objective of general purpose external financial reporting?
A. Reliability.
B. Relevance.
C. Accountability.
D. Understandability.

11


91. The responsibility of governments to justify that their actions in the current period have complied with
public decisions concerning the raising and spending of public monies in the short-term is know as:
A. Operational accountability.
B. Fiduciary responsibility.
C. Legal accountability.
D. Fiscal accountability.
92. Which of the following is a required program revenue category in the government-wide statement of
activities?
A. Grants--capital.
B. Charges for services.
C. Grants--operating.
D. All of the above.

93. Which of the following would increase the balance in net assets--invested in capital assets, net of related
debt?
A. Acquisition of a building to be used by the police department.
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 as a park.
D. None of the above.
94. Which of the following is evidence of fiscal independence for the purpose of considering whether one
entity is a component unit of another?
A. The potential component unit is precluded from issuing long-term debt.
B. The potential component unit raises taxes without the approval of the primary government.
C. The budget of the potential component unit is approved by the primary government.
D. The board or council of the potential component unit includes any members of the primary
government's management team.
95. What adjustments are needed before data from the governmental fund financial statements can be
incorporated into the government-wide financial statements?
A. Conversion from the current financial resources measurement focus to the economic resources
measurement focus.
B. Conversion from the modified accrual basis of accounting to the accrual basis of accounting.
C. Aggregation.
D. All of the above.
96. 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).
97. What is the minimum level of detail required for expenditures presented in the governmental fund
statement of revenues, expenditures, and changes in fund balance?
A. Program and object.
B. Function and character.

C. Program and department.
D. Character and object.

12


98. Which of the following is one of the basic sections of a comprehensive annual financial report?
A. Financial section.
B. Single audit section.
C. Supplementary section.
D. Investment section.
99. Government-wide financial statements present the government's financial position using
A. Total financial resources measurement focus/accrual basis of accounting.
B. Economic resources measurement focus/accrual basis of accounting.
C. Current financial resources measurement focus/modified accrual basis of accounting.
D. Current financial resources measurement focus/cash basis of accounting.
100.Required government-wide statements are a
A. Statement of net assets and statement of cash flows.
B. Statement of net assets, statement of activities, and statement of cash flows.
C. Statement of net assets and statement of activities.
D. Statement of activities and statement of cash flows.
101.Infrastructure assets and long-term liabilities will be reported in the
A. Letter of transmittal.
B. Fund financial statements.
C. Management's discussion and analysis.
D. Government-wide financial statements.
102.Nonmajor funds are reported
A. In the management's discussion and analysis preceding the financial statements.
B. 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.
103.The comprehensive annual financial report (CAFR) of a government should contain a statement of
revenues, expenses, and changes in net assets for
A. Both proprietary and governmental funds.
B. Governmental but not proprietary funds.
C. Proprietary but not governmental funds.
D. Neither governmental nor proprietary funds.
104.Culver City's school district is a legally separate entity, but two of its seven board members are also city
council members and the district is financially dependent upon the city. The school district should be
reported as a
A. Blended unit.
B. Note disclosure.
C. Discrete presentation.
D. Primary government.

13


105.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 city is the primary government.
C. Financial data for the library's General Fund should be blended with the financial data for the city's
special revenue funds.
D. Both A and B are correct.
106.Which of the following items typically differ between governmental fund statements and governmental
activities at the government-wide level?
A. Cash collected on property taxes receivable.

B. Capital outlays.
C. Accounts payable and other accrued expenses.
D. Inventories.
107.Which of the following is not one of the typical placement methods for communicating information to
external users of government financial reports?
A. Recognition in the financial statements.
B. Disclosure in the notes to the financial statements.
C. Presentation as required supplementary information
D. All of the above are used by governments.
108.A report to citizens prepared by some governments to provide highly condensed financial information,
budget summaries, and narrative descriptions is called a (an)
A. Comprehensive annual financial report.
B. Basic financial statement.
C. Popular report.
D. Supplementary report.
109.An effective system of monitoring financial condition may permit management to identify unfavorable
financial trends in sufficient time to take preventive action to avoid financial distress.
True

False

110.There is less emphasis on compliance with generally accepted accounting principles today than there
was in 1975 around the time of New York City's default on several billions of short-term debt.
True

False

111.The key cause of municipal financial crises is the failure of management to raise taxes quickly enough in
response to adverse environmental factors.
True

False

112.Internal managers and credit analysts evaluate financial condition of a government in different ways.
True

False

113.The financial condition of a government is easily determined by calculating the financial ratios discussed
in Chapter 10.
True

False

14


114.Financial condition refers to liquidity while financial position is a much broader concept that includes
not only financial position but consideration of long-term solvency.
True

False

115.Failure to achieve interperiod equity may negatively impact a government's financial condition.
True

False

116.Management practices and legislative policies have little relevance in the evaluation of a government's
financial performance.

True

False

117.Environmental factors facing a government can have a significant impact on a city's fiscal policy.
True

False

118.Financial statements are more relevant in evaluating a city's current financial condition because they
focus on historical transactions than other information in the comprehensive annual financial report.
True

False

119.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 the community and that its citizens desire.
True

False

120.Cash solvency is the government's ability in the long-run to pay all the costs of doing business such as
expenditures in the annual budget and those that appear only in the years in which they must be paid.
True

False

121.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.
True

False

122.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.
True

False

123.The management discussion and analysis (MD&A) is designed to provide substantial information in
"plain English" so financial statement users can assess the financial health of the government.
True

False

124.Evaluating a government's financial condition is important in order to
A. Prevent financial crises from developing.
B. Hold management accountable for the use of tax revenues.
C. Determine if the government can continue to offer the current level of services.
D. All of the above.

15


125.The term that is defined as determining whether current-year revenues are sufficient to pay for the
services provided that year and whether future taxpayers will be required to assume burdens for services
previously provided is
A. Financial position.
B. Financial condition.
C. Interperiod equity.

D. None of these terms.
126.The term that is closely related to the concept of liquidity is
A. Financial condition.
B. Financial position.
C. Interperiod equity.
D. None of these terms.
127.Which of the following financial concepts has been defined by the GASB as "the probability that a
government will meet both its financial obligations to creditors, consumers, employees, taxpayers,
suppliers, constituents, and others as they become due and its service obligation to constituents, both
currently and in the future?"
A. Liquidity.
B. Financial position.
C. Financial leverage.
D. Financial condition.
128.Which of the following trends is most likely to be a signal of impending fiscal stress?
A. A decreasing ratio of total revenues to total expenditures.
B. An increasing ratio of own source revenues to total revenues.
C. A decreasing ratio of debt service expenditures to operating revenues.
D. A decreasing ratio of operating expenditures to total revenues.
129.Which of the following ratios would be most helpful in assessing the liquidity of a governmental
entity?
A. Net tax-supported long-term debt/population.
B. Own source revenues/total revenues.
C. Debt service expenditures/total expenditures.
D. Unreserved fund balance/operating revenues.
130.Benchmarking is a useful tool for
A. Interpreting ratios in order to make informed judgments about financial condition.
B. Comparing ratios to established red-flag levels.
C. Time-series trend analysis.
D. All of the above.

131.After financial ratios are calculated, the results should be compared to
A. The same indicator from prior years.
B. Any credit market or other red flag indicators.
C. A comparative benchmark value, such as those from Moody's Medians.
D. All of the above would make useful comparisons.

16


132.Which of the following ratios would be considered favorable if it was high, rather than low?
A. Total revenues to population.
B. Debt service to total revenues.
C. Operating expenditures to total expenditures.
D. Total General Fund liabilities to General Fund revenues.
133.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. An increasing ratio of total revenues to total expenditures.
134.A measure of the extent to which the government's business-type activities depend on subsidies from
taxpayer or other general revenues rather than having the full cost of the activities' operations funded by
charges to the users of the service is
A. Unrestricted net assets/total revenues.
B. Business-type activities revenues/business-type activities expenses.
C. Total net assets (governmental activities and business-type activities) less total net assets at the
beginning of the year.
D. Total revenues/total expenses.
135.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 assets/total revenues.
C. Total revenues/total expenses.
D. Total net assets (governmental activities and business-type activities) less total net assets at the
beginning of the year.
136.A measure of the adequacy of the amount of the government's total unrestricted net assets or deficit at
the measurement date is
A. Unrestricted net assets/total revenues.
B. Business-type activities revenues/business-type activities expenses.
C. Total net assets (governmental activities and business-type activities) less total net assets at the
beginning of the year.
D. Total revenues/total expenses.
137.One of the most important reasons to evaluate the financial performance of a government is to
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.
138.A term that describes a government's ongoing ability and willingness to raise revenues, incur debt, and
meet its financial obligations as they become due is
A. Financial condition.
B. Fiscal capacity.
C. Economic condition.
D. Financial position.

17


139.Disaster risk, such as potential for natural disasters, 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.
140.Which of the following statements about credit analysts' models is true?
A. Credit analysts focus on debt and finances, and not demographics and management 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. None of the above statements are true.
141.For which of the following is a high or increasing value of the item associated with a stronger financial
condition of a governmental entity?
A. Unfunded pension liability.
B. Property values.
C. Crime rate.
D. Unemployment.
142.Which ratio or concept describes the extent to which the government has lived within its means for the
year?
A. Debt to assets.
B. Current ratio.
C. Interperiod equity.
D. Revenue dispersion
143.A financial capability ratio that measures how much the annual budget is loaded with disbursements to
pay off long-term debt is:
A. Revenue dispersion.
B. Debt service load.
C. Financing margin--bonded debt per capita.
D. Financing margin--legal debt limit.
144.If a state or local government is a party to an agency relationship, it must automatically create an agency
fund in order to be in conformity with generally accepted accounting principles.
True

False

145.An agency fund accounts for assets held by a government for the long-term in the capacity of a trustee
for an individual, organization, other fund, or other government.
True

False

146.An agency relationship that usually necessitates the creation of an agency fund is the collection of
revenues by one government for several of its funds and/or for other governments and their funds.
True

False

147.Tax agency funds assume liability for gross levies, not for the amounts the levying funds or units expect
to collect.
True

False

18


148.It is common for an agency fund to have relatively small fund balances.
True

False

149.An agency fund should be used to account for all special assessment billing and collection, and related

debt service of special assessment debt.
True

False

150.Effective management of cash and investments of individual funds may be enhanced by placing the cash
and investments in a pool under the control of the Treasurer of the government or other official.
True

False

151.When a cash and investments pool is created, the investments of each fund entering the pool should be
transferred to the pool at their book value at the date of the transfer.
True

False

152.Fiduciary funds are often identified in annual reports of state and local governments as "Trust and
Agency Funds."
True

False

153.Investment trust funds and pension trust funds should be accounted for in essentially the same manner as
permanent funds.
True

False

154.If the fair value of stock received by a private-purpose trust fund differs from the par value of the stock,

the premium or discount should be amortized over the remaining life of the stock.
True

False

155.Public Employee Retirement Systems should utilize the modified accrual basis of accounting.
True

False

156.Public employee retirement systems should utilize budgetary accounts in the same manner that General
Funds and special revenue funds should.
True

False

157.Employer (and employee, if applicable) contributions to public employee retirement systems should be
based on actuarial computations.
True

False

158.Public employee retirement systems should label the difference between assets and liabilities on the
statement of plan net assets as "net assets currently available for benefits."
True

False

159.Fiduciary funds, including agency funds, investment trust funds, private-purpose trust funds, and
pension trust funds, report transactions between the fund and both internal and external parties.

True

False

19


160.Which of the following is the most reliable means of distinguishing a trust relationship from an agency
relationship for purposes of deciding which type of fiduciary fund should be used?
A. Examine the amount of money involved; agency relationships generally involve smaller amounts.
B. Examine the aggregate of factors, such as the enactment that brought the relationship into existence,
statutes, regulations, etc, that help define the nature of the relationship.
C. Examine the length of time assets will be held; trust relationships are generally in existence longer
than agency relationships.
D. Examine the wording of any agreements to determine if the word "trust" or "agency" is used.
161.Which of the following activities would be most appropriately recorded by an agency fund?
A. Assets held for employees' federal and state withholding taxes.
B. Deposits held for customers of a city-owned electric utility.
C. Assets held for special assessment bondholders when the city is secondarily liable for the bonds.
D. Assets held for investment, the earnings from which are used for maintenance of the City Cemetery.
162.Which of the following is a valid reason for establishing a tax agency fund and charging a collection fee
to other governments?
A. To help eliminate a General Fund deficit.
B. To increase the total amount of taxes levied.
C. To avoid overlapping taxes.
D. To realize administrative efficiencies from centralizing tax billing and collection activities.
163.Which of the following accounts is least likely to be used by a tax agency fund?
A. Cash.
B. Revenues.
C. Taxes receivable for other funds and units.

D. Due to other funds and units.
164.The long-term liability for special assessment bond issues for which the city is not obligated in any
manner should be recorded in a (an):
A. Agency fund only.
B. Special assessment fund.
C. Agency fund and private-purpose trust fund.
D. None of the funds but should be disclosed in the notes to the financial statements.
165.If special assessment receivables are recorded in the accounts of an agency fund, the appropriate
account(s) to credit is (are):
A. Fund balance.
B. Revenues and deferred revenues.
C. Due to special assessment Bondholders.
D. Interfund transfers in.
166.Which of the following grants received by a city would most appropriately be recorded in a
"pass-through" agency fund?
A. A federal grant for various purposes, for which the ultimate allocation of funds will be decided by a
state agency.
B. A state grant for summer employment of juveniles.
C. A federal grant for repairing and overhauling bridges.
D. A federal grant for upgrading low-rent housing.

20


167.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 transaction, the journal entry made by the debt service fund will include:
A. A debit to Equity in Pooled Cash and Investments in the amount of $3,100,000.
B. A credit to Revenues--Change in Fair Value of Investments in the amount of $100,000.
C. A credit to Investments in the amount of $3,000,000.

D. All of the above.
168.The cash and investment pool of Riverside 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. Undistributed Earnings on Pooled Investments.
C. Revenues.
D. Interfund Receivables.
169.Which of these fiduciary fund types has no fund equity?
A. Investment trust funds.
B. Pension trust funds.
C. Agency funds.
D. Private-purpose trust funds.
170.A difference between agency funds and governmental funds is
A. Agency funds are not included on any fund financial statements.
B. Agency funds use a different basis of accounting.
C. Agency funds do not report fund balances; only assets and liabilities.
D. B and C.
171.Which basis of accounting best maintains the original principal of a trust?
A. Accrual basis.
B. Cash basis.
C. Modified accrual basis.
D. Legal basis.
172.A local civic organization gave the city government $15,000 cash to be used to pay the utility bills of
persons whose incomes were below the poverty level. The city should account for the $15,000 gift in
A. An investment trust fund.
B. The General Fund.
C. A permanent fund.
D. Private-purpose trust fund.
173.A local golfer contributed $100,000 to the city stipulating that the money be invested and that the

earnings thereon be used for maintenance of the city golf course. The $100,000 would most
appropriately be recorded in a (an)
A. Agency fund.
B. Private-purpose trust fund.
C. A permanent fund.
D. Investment trust fund.

21


174.A private-purpose trust fund sold investments in securities having a cost of $32,000 for $34,000,
resulting in a $2,000 realized gain. The gain is
A. Generally transferred to an operating fund or the General Fund.
B. Generally used to maintain the principal of the trust.
C. Generally reported as income of the trust.
D. Generally transferred to a permanent fund.
175.Employer contributions to a public employees retirement system (PERS) should be reported as
A. An expenditure of the General Fund for employees paid by the General Fund.
B. An expense of a proprietary fund for employees paid by a proprietary fund.
C. An addition to net assets of the PERS.
D. All of the above.
176.A statement of cash flows should be prepared for which of the following fiduciary fund types?
A. Agency.
B. Pension trust.
C. Private-purpose trust.
D. None of the above.
177.The financial position of the Policemen's Pension Fund administered by a city should be reported in the
city's basic financial statements as a column in the
A. Statement of fiduciary net assets.
B. Statement of assets, liabilities, and fund balances.

C. Balance sheet--governmental funds.
D. None of the above; the assets belong to the policemen, not to the city.
178.Which of the following is the appropriate basis of accounting for an agency fund?
A. Accrual basis.
B. Modified accrual basis.
C. Cash basis.
D. None of the above.
179.A citizen contributed $200,000 to the city stipulating that the money be invested and that the earnings
thereon be used for maintenance of the city municipal swimming pool. The $200,000 would most
appropriately be recorded in a (an)
A. Agency fund.
B. Private-purpose trust fund.
C. Permanent fund.
D. Endowment fund.
180.In which of the following circumstances is the use of a fiduciary fund appropriate?
A. When assets are held for the families of the government's police officers killed in the line of duty.
B. When assets are held for other governments in an investment pool.
C. When assets are held for Internal Revenue Code Section 457 deferred compensation plans.
D. All of the above.
181.Which of the following is the appropriate measurement focus for agency funds?
A. Economic resources.
B. Current financial resources.
C. Cash and cash equivalents.
D. None of the above.

22


182.Fiduciary funds accounted for in a manner similar to proprietary funds are
A. Agency funds and investment trust funds.

B. Pension trust funds, agency funds, investment trust funds, private-purpose trust funds.
C. Private-purpose trust funds and agency funds.
D. None of the above.
183.Which of the following activities would be accounted for 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 which are used for maintenance of a private golf course, which is used by many city residents.
184.Under GASB standards effective for 2006 and beyond, how will a government report other
post-employment retirement benefits (OPEB)?
A. By disclosing information about OPEB in the notes to the financial statements, but without display of
OPEB expenses or liabilities on the face of the financial statements.
B. In a manner that is quite similar to the reporting requirements for pension plans.
C. Using two different methods, one for health care plans other types of OPEB.
D. By using a modified accrual basis, which requires only expenditures of the current period be reported.
185.Which of the following statements is true about other post-employment retirement benefits (OPEB)?
A. These statements relate only to health care plans, not life insurance or other benefit plans.
B. Employers must retroactively apply these standards in recognizing the expense and liability related to
commitments to benefit plans for retirees.
C. Relative to GASBS 26, GASBS 43 and GASBS 45 (issued in 2004) significantly expand on types of
OPEB reported.
D. None of the above.
186.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. All of the above are true statements.

23

Ch7-10 Key
1.

Internal service funds of one government may not provide goods or services, on a
cost-reimbursement basis, to other governments.
FALSE
The definition of internal service funds quoted in the text is to provide for service to other
governments as well as to other departments or agencies of the unit operating the internal service
fund. While internal service funds exist primarily to provide goods and services to other departments
and agencies of the same government, there is no probation from providing the goods or services to
other governments as well.
Content: Concept
Level: Easy
Wilson - Chapter 07 #1

2.

Revenues of internal service funds should be recognized only when they are expected to be collected
in time to pay current liabilities of the fund.
FALSE
Revenues of internal service funds should be recognized on the full accrual basis: when earned,
without regard to when they will be collected or available to pay current liabilities of the fund.
Content: Concept
Level: Medium
Wilson - Chapter 07 #2

3.

Internal service funds should account for operating expenditures on the full accrual basis.
FALSE
Internal service funds account for expenses, not expenditures, and use the full accrual basis.
Content: Concept
Level: Medium
Wilson - Chapter 07 #3

4.

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.
FALSE
As for a business enterprise, including a depreciation charge is necessary to determine the full cost of
services.
Content: Concept
Level: Medium
Wilson - Chapter 07 #4

1


5.

Internal service funds account for any long-term liabilities to be serviced from revenue derived from
fund operations.
TRUE
Since the internal service fund uses full accrual accounting, it recognizes any long-term liabilities of
the fund. Long-term liabilities of an internal service fund ordinarily results from advances from other
funds or governments, not from outside creditors.
Content: Concept

Level: Easy
Wilson - Chapter 07 #5

6.

The fund equity of an internal service fund consists of contributed equity and reserves for assets that
will not be converted into cash in the normal operation of the fund.
FALSE
Under GASBS 34, fund equity consists net assets invested in capital assets (net of related debt),
restricted, and unrestricted.
Content: Concept
Level: Easy
Wilson - Chapter 07 #6

Cash: 350,000
Inventory of Supplies: 38,700
Interfund Loan from Electric Utility Fund: 320,000
Interfund Transfer In from General Fund: 89,200
Wilson - Chapter 07

7.

In the entry above the account "Interfund Loan from Electric Utility Fund" is credited for $320,000
because this amount was loaned by the electric utility fund to the supplies fund and will have to be
repaid by the supplies fund.
TRUE
Loan is the term described in GASBS 34 that replaces "advances" (a term meaning a long-term
receivable or payable) and "Due to..." (a current liability). Interfund loans should be properly
classified as current or noncurrent receivables or payables.
Content: Journal Entry

Level: Medium
Wilson - Chapter 07 #7

2