AICPA Governmental & Not-for-Profit Accounting 2 — Questions and Answers
Question 1: How are capital assets (e.g., buildings, equipment) reported in government-wide financial statements?
- Expensed in the period of acquisition
- Reported at fair value each year
- Capitalized and depreciated over their useful lives (Correct answer)
- Recorded as fund balance reserves
Correct answer: Capitalized and depreciated over their useful lives
Under the full accrual basis used for government-wide statements, capital assets are capitalized and depreciated, matching the cost over their service lives.
Question 2: A special revenue fund is used to account for:
- Proceeds from the issuance of long-term debt
- Resources legally restricted or committed for specific purposes other than debt service or capital projects (Correct answer)
- Assets held in a trustee capacity
- General operating revenues of the government
Correct answer: Resources legally restricted or committed for specific purposes other than debt service or capital projects
Special revenue funds segregate revenues that are legally restricted or committed to specific purposes, such as a dedicated gas-tax fund for road maintenance.
Question 3: What is an encumbrance in governmental accounting?
- A long-term liability for pension obligations
- A commitment of fund resources against an approved appropriation for a purchase order or contract (Correct answer)
- Accrued interest payable on municipal bonds
- A lien placed on government property
Correct answer: A commitment of fund resources against an approved appropriation for a purchase order or contract
An encumbrance represents a reservation of an appropriation for a future expenditure (e.g., when a purchase order is issued) to prevent over-spending the budget.
Question 4: Under GASB, enterprise funds are used to report activities that are financed primarily through:
- Property taxes and intergovernmental grants
- User fees and charges for services to external parties (Correct answer)
- Investment income and endowment principal
- Legislative appropriations from the general fund
Correct answer: User fees and charges for services to external parties
Enterprise funds account for activities where the cost of providing services is recovered primarily through fees charged to external users, similar to a business.
Question 5: The Management's Discussion and Analysis (MD&A) in a government's annual report is classified as:
- Basic financial statements
- Required supplementary information (RSI) (Correct answer)
- Notes to the financial statements
- Statistical section
Correct answer: Required supplementary information (RSI)
The MD&A is required supplementary information (RSI) that precedes the basic financial statements and provides an objective analysis of financial activities.
Question 6: A permanent fund is a governmental fund used to report resources that are legally restricted so that:
- Only income may be expended for the government's programs, not principal (Correct answer)
- Both principal and income may be used for any governmental purpose
- Resources are held for outside beneficiaries such as pension recipients
- Capital assets are purchased and maintained
Correct answer: Only income may be expended for the government's programs, not principal
Permanent funds require the principal to remain intact; only earnings may be spent, and those earnings must benefit the government's programs or citizenry.
Question 7: Which GASB pronouncement established infrastructure asset reporting requirements and introduced the modified approach as an alternative to depreciation?
- GASB Statement No. 14
- GASB Statement No. 34 (Correct answer)
- GASB Statement No. 45
- GASB Statement No. 68
Correct answer: GASB Statement No. 34
GASB 34 required governments to report infrastructure assets for the first time and allowed the modified approach — maintaining assets at a set condition level — as an alternative to depreciation.
AICPA Governmental & Not-for-Profit Accounting 2
How are capital assets (e.g., buildings, equipment) reported in government-wide financial statements?