Governmental accounting — CPA FAR practice questions

A pension trust fund maintained by a city for its employees' defined benefit plan is reported using:

1. Modified accrual basis and current financial resources measurement focus
2. Full accrual basis and economic resources measurement focus
3. Cash basis, since pension benefits are paid out only when employees retire
4. Budgetary basis, matching the city's annual appropriated pension contribution

Answer: B — Full accrual basis and economic resources measurement focus

A) Modified accrual and current resources focus are used by governmental funds, not fiduciary funds. B) correct - all fiduciary funds, including pension trust funds, use full accrual accounting and economic resources measurement focus. C) Cash basis is not a permitted GAAP basis for a pension trust fund's reporting. D) Budgetary basis applies to governmental fund budget-to-actual schedules, not fiduciary fund financial statements.

A city council passes a formal ordinance before fiscal year-end committing $2 million of General Fund balance to a specific capital project; only an equally formal council action can modify or rescind that commitment. This amount is classified under GASB 54 as:

1. Restricted
2. Assigned
3. Committed
4. Nonspendable

Answer: C — Committed

A) restricted requires an external constraint or constitutional/enabling-legislation limitation, not a self-imposed internal action. B) assigned reflects a lower level of constraint that can be established by a body or official with delegated authority and can be modified more easily than a formal governing-body action. C) correct - committed fund balance requires formal action by the government's highest level of decision-making authority, taken before year-end, that can only be undone by an equally formal action. D) nonspendable relates to form (inventories, prepaids, permanent fund corpus), not to a council's budgetary commitment.

Resources reported in fiduciary funds are:

1. Presented in both the fund financial statements and the government-wide statements
2. Presented only in the government-wide statement of net position, not fund statements
3. Excluded from government-wide statements, since they are not the government's own
4. Presented in government-wide statements but omitted from all fund-level statements

Answer: C — Excluded from government-wide statements, since they are not the government's own

C) correct - fiduciary resources are held for others and cannot be used to support the government's programs, so they appear only in the fiduciary fund statements. A) Inclusion in the government-wide statements would imply the resources are available to the government. B) The government-wide statements omit fiduciary activity altogether. D) Fiduciary funds do have their own fund-level statements.

A government that has been using the modified approach for its road network decides to discontinue using it and begin depreciating the roads. This change would MOST likely be treated as:

1. A correction of an error requiring restatement of previously issued statements
2. A prospective change, depreciating the assets over their remaining lives
3. A change requiring neither note disclosure nor any effect on reported amounts
4. A change reported in the notes only, with no effect on the financial statements

Answer: B — A prospective change, depreciating the assets over their remaining lives

B) correct - abandoning the election is a change in method going forward, so depreciation begins over the remaining lives from that point. A) The prior reporting was permitted when made, so no error exists. C) A change of this significance carries disclosure. D) The change starts a depreciation charge, which affects reported amounts.

A city's general fund transfers $500,000 to its enterprise fund with no expectation of repayment and no equivalent exchange of goods or services. This transaction is reported by both funds as:

1. Interfund services provided and used, recorded as revenue and expense respectively
2. An interfund loan, recorded as due to and due from the other fund by each
3. An interfund reimbursement, charged as an expenditure of the paying fund alone
4. A transfer, an other financing use in one fund and source in the other

Answer: D — A transfer, an other financing use in one fund and source in the other

D) correct - a one-way flow with nothing of equivalent value returned and no repayment expected is nonreciprocal and is reported as a transfer. A) Services provided and used requires a sale of goods or services at approximate market price. B) A loan requires an expectation of repayment, which the facts rule out. C) A reimbursement repays a fund that paid a cost belonging to another fund.

In governmental fund financial statements, the acquisition of a capital asset is:

1. Recorded as an expenditure in the fund but capitalized government-wide
2. Recorded as an expenditure in the fund and omitted government-wide
3. Capitalized in the fund and depreciated over its estimated useful life
4. Reported only in the notes, with no expenditure or asset recognized

Answer: A — Recorded as an expenditure in the fund but capitalized government-wide

A) Correct - the fund charges an expenditure under the current financial resources focus, and the conversion entry capitalizes the asset on the Statement of Net Position. B) The asset must appear government-wide. C) Governmental funds neither capitalize nor depreciate. D) Note disclosure alone omits both required presentations.

Which GASB Statement No. 54 fund balance classification applies to amounts that cannot be spent because they are not in spendable form — such as inventories and prepaid items — or must be maintained intact, such as the principal of a permanent fund?

1. Nonspendable
2. Restricted
3. Committed
4. Assigned

Answer: A — Nonspendable

A) correct - nonspendable fund balance captures amounts inherently not spendable (inventory, prepaids) or legally/contractually required to remain intact (permanent fund principal). B) restricted applies to externally or legally imposed constraints, not the nonspendable-form concept. C) committed reflects the government's own highest-level formal action, not an inherent form limitation. D) assigned reflects intended use identified by someone with delegated authority, again not tied to spendable form.

The fair value hierarchy under ASC 820 consists of:

1. Two levels: quoted market prices and management's own estimates
2. Four levels: cost, market, fair value, and replacement cost
3. Three levels: quoted, observable, and unobservable inputs
4. One level applied uniformly to every fair value measurement

Answer: C — Three levels: quoted, observable, and unobservable inputs

C) Correct - the hierarchy ranks the inputs, from quoted prices in active markets down to unobservable inputs. A) It has three levels, and Level 2 is observable rather than estimated. B) That list mixes measurement bases, not input levels. D) A single level would make the required disclosures meaningless.

Required Supplementary Information (RSI) for a state or local government typically includes:

1. Audited financial statements from prior fiscal years
2. Bond indenture agreements and long-form debt disclosures
3. MD&A and budgetary comparison schedules and pension schedules
4. Federal and state tax return workpapers filed by the government

Answer: C — MD&A and budgetary comparison schedules and pension schedules

A) Prior-year audited statements are not RSI. B) Debt disclosures belong in the notes proper. C) Correct - RSI includes MD&A, budget-to-actual, pension/OPEB schedules. D) Tax returns are not part of GAAP reporting.

Encumbrance accounting in governmental funds:

1. Records purchase orders as expenditures at the time they are issued
2. Is not used because governments do not track outstanding commitments
3. Records purchase orders as long-term liabilities on the balance sheet
4. Reserves budget appropriations without recording an expenditure yet

Answer: D — Reserves budget appropriations without recording an expenditure yet

A) Encumbrances are not expenditures until goods received. B) Encumbrance accounting is widely used. C) Encumbrances are not long-term liabilities. D) Correct - reserve budget without hitting expenditures.

Custodial fund?

Reports fiduciary activity not meeting trust-fund criteria, e.g., collecting/remitting taxes on behalf of other governments.

Interfund services provided and used?

A market-priced exchange of goods/services between funds; recorded as revenue/expense (or expenditure), not a transfer.

Voluntary nonexchange transaction (GASB 33)?

Resources provided by a party, such as a private donor, without being legally compelled, often carrying purpose restrictions the recipient accepts.

GASB 96 SBITA accounting?

Modeled on GASB 87 leases — recognize a subscription asset and subscription liability for qualifying IT subscription arrangements.