Governmental and Nonprofit Accounting: Theory and Practice, 10e (Freeman)
Chapter 1 Governmental and Nonprofit Accounting—Environment and Characteristics
1. Which of the following would not be considered a government or nonprofit organization?
A. A software company that sells software exclusively to state and local governments.
B. A public elementary school.
C. A church.
D. A private trust organized for charitable purposes.
2. Which of the following activities would most likely be accounted for as a business-type
activity?
A. Fire protection.
B. Recreation.
C. Water operations.
D. Street maintenance.
3. Prior to the creation of the Governmental Accounting Standards Board in 1984, which of the
following organizations had the greatest influence over accounting concepts, principles, and
standards for the state and local governments?
A. The National Council on Governmental Accounting (NCGA)
B. The National Association of College and University Business Officers (NACUBO).
C. The American Institute of Certified Public Accountants (AICPA).
D. The Comptroller General of the United States.
4. Which of the following is considered a health and welfare organization?
A. Secondary schools.
B. Young Men’s Christian Association (YMCA).
C. Child protection agencies.
D. United Way.
5. Which of the following characteristics best distinguishes a government entity from a business
entity?
A. Governments operate in a very small section of the economy while businesses operate
globally.
B. Cost analysis and other control and evaluation techniques are essential to ensure that
resources are used economically and efficiently.
C. Those contributing resources to the entity do not necessarily receive a direct or
proportionate share the services.
D. Businesses must acquire and convert scarce resources while governments can demand
whatever they need.
6. Which source of financial resources is unique to governments?
A. Borrowings.
B. Gifts and grants.
C. Charges for services provided.
D. Taxation.
7. Which of the following is not an operational accountability measure for a government?
A. Economic cost of providing services.
B. Net income.
C. Assessment whether a government raised sufficient revenues each period to cover the
cost of providing services.
D. Assessment whether services are being provided economically and efficiently.
8. Which of the following is not a primary financial reporting objective of state and local
government (SLG) reporting?
A. Provide information necessary to assess the level of LG services and its ability to
continue to finance its activities and meet its obligations.
B. Provide information necessary for investment and credit decisions.
C. Provide a means of demonstrating the SLG’s accountability that enables users to assess
that accountability.
D. Provide information necessary to evaluate the SLG’s operating results for the period.
(Answer B; Difficult; LO4)
9. The primary purpose of a fund is
A. To provide expenditure authority for a government or not-for-profit organization.
B. To segregate an organization’s resources according to the purpose(s) for which they are to
be used.
C. To keep an organization’s constituency from trying to insist that the organization utilize
resources that it wants to save for a specific future objective.
D. To confuse and confound the legislative body as to the use and purpose of government
resources.
10. Which of the following is not a characteristic of a fund?
A. Fiscal entity.
B. Separate legal entity.
C. Accounting entity.
D. Contains self-balancing set of accounts.
11. Fixed-dollar budgets and appropriations are most often found in
A. All funds of a government.
B. Expendable funds.
C. Nonexpendable funds.
D. In not-for-profit organizations, but not governments.
12. Expenditures in a governmental (expendable) fund would not potentially include
A. Salaries and wages.
B. Capital outlay.
C. Long-term debt principal retirement.
D. Depreciation.
13. Expenses in a proprietary (nonexpendable) fund would not potentially include
A. Salaries and wages.
B. Long-term debt interest payments.
C. Long-term debt principal retirement.
D. Depreciation.
14. Expenses and expenditures are least likely to differ in amount for which type of transaction?
A. Salaries.
B. Capital asset purchases.
C. Debt principal retirements.
D. Depreciation on capital assets.
15. The primary users of external financial reports, as identified by the GASB, include all of the
following except
A. Investors and creditors.
B. Other governments.
C. Citizens.
D. Legislative and oversight bodies.
16. Which of the following organizations has had the least – impact on the development of
GAAP for state and local governments?
A. American Hospital Association.
B. Federal Accounting Standards Advisory Board
C. National Association of College and University Business Officers.
D. National Committee on Governmental Accounting.
17. The Financial Accounting Foundation does not have oversight responsibilities over
A. The Financial Accounting Standards Board (FASB).
B. The Federal Accounting Standards Advisory Board (FASAB).
C. The Financial Accounting Standards Advisory Council (FASAC).
D. The Governmental Accounting Standards Board (GASB).
18. What best describes the relationship of the FASB and the GASB?
A. They are co-equal bodies with different areas of responsibility for standards setting.
B. The FASB standards are authoritative for governments. However, the FASB asks the
GASB to establish guidelines for many unique transactions of government that the FASB
does not have time to consider.
C. GASB standards are authoritative for governments unless they have been overruled by
the FASB.
D. Governments are not permitted to apply any FASB standard under any circumstances for
any government operations.
19. Which organization has the highest level of authority for a setting GAAP for nongovernment,
not-for-profit organizations?
A. Financial Accounting Standards Board (FASB).
B. Governmental Accounting Standards Board (GASB).
C. American Institute of Certified Public Accountants (AICPA).
D. National Council on Governmental Accounting (NCGA).
20. All not-for-profit organizations that do not meet the definition of governments must apply
A. FASB standards.
B. GASB standards.
C. FASAB standards.
D. AICPA Audit and Accounting Guide, Not-for-Profit Organizations.
21. Each of the following would be defined as a governmental entity based on the definition of a
government that was jointly developed by the GASB and FASB except
A. A Historic Preservation District created by the governing board of the municipal
government.
B. A Charter School incorporated in accordance with state law and accountable to the state
oversight agency.
C. A hospital formerly owned by a local government entity that was sold to and is now
owned by a private, for-profit health care management corporation.
D. A financing authority that is legally separate from the municipal government, but
provides financing for the government’s major capital projects. The governing board of
the financing authority is appointed by the municipal government’s board.
22. Which of the following is considered to be an authoritative source of GAAP for a
nongovernmental not-for-profit organization?
A. GASB standards.
B. AICPA AcSEC Practice Bulletins.
C. FASB Accounting Standards Codification.
D. AICPA Audit and Accounting Guide, Not-for-Profit Organizations.
23. Which of the following is not a characteristic used to determine if an organization is a
government?
A. The majority of governing board members are appointed by government entities.
B. An entity that has the power to enact and enforce a property tax levy.
C. An entity receives over half of its resources from other governmental entities.
D. The potential for unilateral dissolution with the net assets reverting to a government upon
dissolution.
24. The governmental GAAP hierarchy was established by
A. The Governmental Accounting Standards Board (GASB).
B. The Financial Accounting Standards Board (FASB).
C. The American Institute of Certified Public Accountants (AICPA).
D. The Government Accountability Office (GAO).
25. Which of the following publications is specifically identified in the GAAP hierarchy for state
and local governments as authoritative?
A. FASB Accounting Standards Codification.
B. GASB Implementation Guides.
C. GAO Yellow Book.
D. GASB Concepts Statements.
26. Which of the following has the highest level of authority for a government under GAAP?
A. A FASB standard.
B. A GASB Implementation Guide.
C. AICPA Industry Audit and Accounting Guide for local governments cleared by the
GASB.
D. An article in the Journal of Accountancy.
27. Which of the following has the highest level of authority for a government in the
governmental GAAP hierarchy?
A. A FASB standard on pension accounting.
B. A GASB standard on pension accounting.
C. AICPA state and local government audit guide coverage of pensions.
D. The coverage of pensions in a Journal of Accountancy article.
28. Which of the following has the highest level of authority for a government in the
governmental GAAP hierarchy?
A. GASB Codification of Governmental Accounting and Financial Reporting Standards.
B. GASB Concepts Statement.
C. GASB Technical Bulletin.
D. AICPA Industry Audit and Accounting Guide.
29. Rank the following documents in the proper order in the governmental GAAP hierarchy:
a. GASB Implementation Guide.
b. GASB Interpretation.
c. GASB Technical Bulletin.
d. AICPA Practice Bulletin.
A. a; b; c; d.
B. b; a; c; d.
C. b; c; d; a.
D. c; d; b; a.
1. If a government is obligated to legally report information in a manner that differs from
GAAP
A. GAAP take precedence over the legal requirements.
B. Legal requirements take precedence over GAAP.
C. Both GAAP requirements and legal requirements must be met.
D. Information should be presented that meets as many legal requirements as possible
without violating GAAP in a material manner.
2. Which of the following is not a fund category used by state and local governments?
A. Fiduciary funds.
B. Plant and Equipment funds.
C. Governmental funds.
D. Proprietary funds.
3. Which of the following is an official fund category used by state and local governments?
A. Current funds.
B. Expendable funds.
C. Governmental funds.
D. General capital asset funds.
4. Which of the following is considered a proprietary fund?
A. General Fund.
B. Special Revenue Fund.
C. Permanent Fund.
D. Internal Service Fund.
5. The operations of a city bus line receiving all its funding from user charges would be
accounted for in
A. A General Fund.
B. An Enterprise Fund.
C. An Internal Service Fund.
6. Which of the following is not considered a fiduciary fund?
A. Agency Fund
B. Investment Trust Fund
C. Permanent Fund
D. Private-purpose Trust Fund
7. Activities of a central motor pool that provides and services vehicles for the use of municipal
employees on official business should be accounted for in
A. General Fund.
B. Enterprise Fund.
C. Internal Service Fund.
D. Special Revenue Fund.
8. A government can only have one
A. Capital Projects Fund.
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B. General Fund.
C. Private-Purpose Trust Fund.
D. Special Revenue Fund.
9. Which of the following is not considered a governmental fund?
A. General Fund.
B. Debt Service Fund.
C. Permanent Fund.
D. Internal Service Fund.
10. Which of the following is the basic proprietary fund accounting equation?
A. Assets – Liabilities = Net Assets.
B. Financial Assets – Related Liabilities = Fund Balance.
C. Financial Assets + Deferred Outflows – Related Liabilities – Deferred Inflows = Fund
Balance.
D. Assets + Deferred Outflows – Liabilities – Deferred Inflows = Net Position.
11. Which of the following uses the flow of economic resources measurement focus?
A. General Fund.
B. Debt Service Fund.
C. Special Revenue Fund.
D. Internal Service Fund.
12. Proprietary funds recognize
A. Expenditures when the fund incurs a liability for goods or services.
B. Expenditures when the fund uses goods or services.
C. Expenses when the fund incurs a liability for goods or services.
D. Expenses when the fund uses goods or services.
13. Which of the following is the basic governmental fund accounting equation?
A. Assets – Liabilities = Net Assets.
B. Financial Assets – Related Liabilities = Fund Balance.
C. Financial Assets + Deferred Outflows – Related Liabilities – Deferred Inflows = Fund
Balance.
D. Assets + Deferred Inflows – Liabilities – Deferred Outflows = Net Position
14. Which of the following uses the flow of current financial resources measurement focus?
A. Agency Fund.
B. Enterprise Fund.
C. Special Revenue Fund.
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D. Internal Service Fund.
15. In which of the following financial statements should a government not report depreciation
expense?
A. Fiduciary fund financial statements.
B. Governmental fund financial statements.
C. Proprietary fund financial statements.
D. Government-wide financial statements.
16. The availability criterion for recognizing revenues applies to all of the following funds
except
A. Capital Projects Funds.
B. Debt Service Funds.
C. Internal Service Funds.
D. Special Revenue Funds.
17. Governmental funds recognize
A. Expenses when the governmental unit uses goods or services.
B. Expenditures when the governmental unit incurs a liability for goods or services.
C. Expenditures when the fund incurs a liability.
D. Expenses when the fund assets are consumed.
18. Which of the following would not be classified as an expenditure?
A. Salaries and wages.
B. Depreciation.
C. Capital outlay.
D. Debt service — principal and interest.
19. Assume that Kelly County issues $3,000,000 in general obligation bonds to build a new fire
station and $7,000,000 in revenue bonds to finance the upgrade of their water treatment
facility. How will these transactions affect the funds of the county?
A. Financial assets of the Capital Projects Fund will increase by $10,000,000, as will the
related fund liabilities.
B. Financial assets and related fund liabilities of the Capital Projects Fund will increase by
$3,000,000; current assets and long-term liabilities will increase by $7,000,000 in the
Water Enterprise Fund.
C. Financial assets, but not the related fund liabilities, will increase in the General Fund by
$10,000,000.
D. Financial assets, but not the related fund liabilities, will increase in the Capital Projects
Fund by $3,000,000; current assets and the long-term liabilities will increase by
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$7,000,000 in the Water Enterprise Fund.
20. Ashley Woods Village issued $4,000,000 in general obligation bonds to finance the widening
of a local thoroughfare. This transaction will most likely
A. Increase fund balance in the General Fund by $4,000,000.
B. Decrease fund balance in the General Fund by $4,000,000.
C. Increase fund balance in the Capital Projects Fund by $4,000,000.
D. Decrease fund balance in the Capital Projects Fund by $4,000,000.
21. Ashley Woods Village paid $1,000,000 principal and $200,000 interest on its general
obligation bonds that it issued to finance widening of a local thoroughfare. This transaction
will most likely
A. Decrease fund balance in the Capital Projects Fund by $1,000,000.
B. Decrease fund balance in the Capital Projects Fund by $1,200,000.
C. Decrease fund balance in the Debt Service Fund by $1,000,000.
D. Decrease fund balance in the Debt Service Fund by $1,200,000.
22. The police department of the city of Newport purchased 10 new patrol cars at the beginning
of the new budget year at a total cash price of $250,000. This purchase will
A. Increase capital assets reported in the General Fund by $250,000.
B. Have no effect on capital assets in the General Fund, but will decrease fund balance in the
General Fund by $250,000.
C. Increase capital assets reported in the General Fund by $250,000, as well as decrease
fund balance in the General Fund by the same amount.
D. Increase both capital assets and fund balance in the General Fund by $250,000.
23. The City of Ruth owns and operates an electric utility. The utility purchases new electric
transmission lines for $6,000,000 so that it can provide electricity to new customers. This
purchase will most likely
A. Increase expenditures reported in the General Fund by $6,000,000.
B. Increase capital assets reported in the Capital Projects Fund by $6,000,000.
C. Increase capital assets reported in the Enterprise Fund by $6,000,000.
D. Increase expenses reported in the Enterprise Fund by $6,000,000.
24. A transaction in which a government issues general obligation bonds to finance the
construction of a new police station would
A. Increase liabilities in a Debt Service Fund.
B. Increase liabilities in a Capital Projects Fund.
C. Decrease fund balance in a Debt Service Fund.
D. Increase fund balance in a Capital Projects Fund.
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