CGAP Finance 4 — Questions and Answers
Question 1: A government calculates its current ratio as 0.6:1. What does this indicate about the entity's short-term financial position?
- The government has strong short-term liquidity with excess current assets
- Current liabilities exceed current assets, suggesting potential short-term liquidity risk (Correct answer)
- The ratio is irrelevant for governments because they cannot go bankrupt
- The government has violated GASB fund balance requirements
Correct answer: Current liabilities exceed current assets, suggesting potential short-term liquidity risk
A current ratio below 1.0 means current liabilities exceed current assets, indicating the government may have difficulty meeting short-term obligations without additional revenue or borrowing.
Question 2: Which of the following is considered a nonspendable fund balance component under GASB 54?
- Amounts restricted by enabling legislation
- Perpetual care endowment principal held in a permanent fund (Correct answer)
- Amounts committed by formal board resolution
- Reserves for encumbrances outstanding at year-end
Correct answer: Perpetual care endowment principal held in a permanent fund
Nonspendable fund balance includes amounts that cannot be spent because they are not in spendable form, such as the principal of permanent funds that must be preserved in perpetuity.
Question 3: A government auditor is evaluating a revenue bond issue. Which factor most distinguishes revenue bonds from general obligation bonds?
- Revenue bonds are backed by the full faith and credit and taxing power of the government
- Revenue bonds are repaid from specific pledged revenues rather than general tax revenues (Correct answer)
- Revenue bonds are exempt from federal income tax while general obligation bonds are not
- Revenue bonds require voter approval while general obligation bonds do not
Correct answer: Revenue bonds are repaid from specific pledged revenues rather than general tax revenues
Revenue bonds are secured by and repaid from specific revenue streams (e.g., utility fees, tolls), whereas general obligation bonds pledge the government's full taxing authority.
Question 4: Under GASB standards, which of the following would be classified as a fiduciary activity?
- A city-operated water utility that charges user fees
- A county's investment pool where it manages funds on behalf of other governments (Correct answer)
- A government's internal print shop that serves multiple departments
- A special revenue fund for local tourism promotion grants
Correct answer: A county's investment pool where it manages funds on behalf of other governments
Fiduciary activities involve resources held by a government in a trustee or custodial capacity for others, such as an investment pool managing funds for external participants.
Question 5: A city overstated its property tax revenues by $2 million due to failing to record an adequate allowance for uncollectible taxes. What financial statement impact does this error have?
- Fund balance and revenues are both overstated (Correct answer)
- Only the balance sheet is affected because taxes are a balance sheet item
- Expenditures are understated and fund balance is correctly stated
- Revenues are overstated but fund balance is unaffected due to encumbrance offsets
Correct answer: Fund balance and revenues are both overstated
Failing to record an adequate allowance for uncollectible property taxes overstates net revenues, which in turn overstates fund balance at year-end.
Question 6: Which of the following best describes the purpose of a Comprehensive Annual Financial Report (CAFR) or Annual Comprehensive Financial Report (ACFR)?
- To report only federally required financial information for grant compliance purposes
- To provide a complete, multi-section financial report including government-wide, fund, and statistical sections (Correct answer)
- To replace the need for an independent audit of governmental financial statements
- To report only the governmental activities of the primary government, excluding component units
Correct answer: To provide a complete, multi-section financial report including government-wide, fund, and statistical sections
The ACFR is a comprehensive report that includes introductory, financial, and statistical sections, covering government-wide statements, fund statements, notes, and required supplementary information.
Question 7: A government auditor finds that a department head verbally approved $300,000 in expenditures without obtaining a purchase order. This primarily represents a failure of which control?
- Segregation of duties between payment and receiving functions
- The pre-expenditure authorization and encumbrance process (Correct answer)
- Reconciliation of subsidiary ledgers to control accounts
- Physical safeguarding of cash and marketable securities
Correct answer: The pre-expenditure authorization and encumbrance process
Pre-expenditure authorization—requiring a purchase order before commitments are made—is a critical control that ensures spending is approved and encumbrances are recorded before obligations are incurred.
CGAP Finance 4
A government calculates its current ratio as 0.6:1.
What does this indicate about the entity's short-term financial position?