CGAP Finance 2 — Questions and Answers
Question 1: A government entity uses the modified accrual basis of accounting. When should revenues be recognized under this method?
- When cash is received regardless of the period earned
- When measurable and available to finance current-period expenditures (Correct answer)
- When the legal obligation to pay arises
- When approved in the annual budget
Correct answer: When measurable and available to finance current-period expenditures
Under modified accrual, revenues are recognized when they are measurable and available (collectible within 60 days after year-end) to finance current-period expenditures.
Question 2: Which of the following best describes an encumbrance in governmental accounting?
- A lien placed on government property by a creditor
- A reservation of appropriations for anticipated purchase commitments (Correct answer)
- An accrued liability for services already received
- A fund balance restriction required by law
Correct answer: A reservation of appropriations for anticipated purchase commitments
Encumbrances represent commitments related to unperformed contracts, reserving appropriation authority so funds are not overspent before goods or services are received.
Question 3: A CGAP candidate reviews a government's capital project fund. Which of the following transactions would NOT typically be recorded in a capital project fund?
- Proceeds from a bond issuance for a new courthouse
- Construction costs for a new public library
- Routine maintenance expenses for an existing road (Correct answer)
- Transfer of unexpended bond proceeds to a debt service fund
Correct answer: Routine maintenance expenses for an existing road
Routine maintenance of existing assets is an operating expenditure recorded in the general fund, not in a capital projects fund, which accounts for major capital acquisitions.
Question 4: Under GASB standards, which measurement focus is used for governmental funds?
- Economic resources measurement focus
- Current financial resources measurement focus (Correct answer)
- Cash flow measurement focus
- Total resources measurement focus
Correct answer: Current financial resources measurement focus
Governmental funds use the current financial resources measurement focus, reporting only current assets and current liabilities and their effect on fund balance.
Question 5: A government issues $5 million in general obligation bonds at a premium of $200,000. In the governmental funds, how should the premium be reported?
- As revenue in the general fund
- As an other financing source in the debt service fund
- As a deferred inflow of resources
- As an other financing source in the fund receiving the proceeds (Correct answer)
Correct answer: As an other financing source in the fund receiving the proceeds
Bond premiums are reported as other financing sources in the fund that receives the bond proceeds, separate from the par value of the bonds.
Question 6: Which type of budget is most commonly adopted by state and local governments and carries legal authority to spend?
- Program budget
- Zero-based budget
- Appropriated budget (Correct answer)
- Performance budget
Correct answer: Appropriated budget
The appropriated (or legal) budget is formally adopted by the legislative body and establishes the legal authority and spending limits for a fiscal year.
Question 7: An auditor discovers that a government department's actual expenditures exceed its appropriation by 3%. What is the most significant concern?
- The department has poor internal controls over procurement
- The government may have violated its legal spending authority (Correct answer)
- The budget was not prepared using generally accepted accounting principles
- The financial statements will require a qualified opinion
Correct answer: The government may have violated its legal spending authority
Exceeding an appropriation violates the legal budget authority granted by the legislative body, which is a compliance violation regardless of whether internal controls are otherwise adequate.
CGAP Finance 2
A government entity uses the modified accrual basis of accounting.
When should revenues be recognized under this method?