CMM CMM Financial Management & Budgeting 2 — Questions and Answers
Question 1: Which method of capital budgeting analysis calculates the time required for cumulative project savings to equal the initial investment?
- Net present value
- Internal rate of return
- Payback period (Correct answer)
- Benefit-cost ratio
Correct answer: Payback period
The payback period method determines how many years it will take for a project's savings or revenues to recover the upfront capital cost.
Question 2: Under GASB Statement No. 34, what is the significance of government-wide financial statements?
- They replace fund-based statements entirely
- They provide an accrual-basis view of all governmental and business-type activities (Correct answer)
- They are required only for cities with populations over 50,000
- They report only restricted and committed fund balances
Correct answer: They provide an accrual-basis view of all governmental and business-type activities
GASB 34 requires government-wide statements using accrual accounting to show the full economic cost of governmental and business-type activities.
Question 3: Which type of municipal revenue bond is repaid solely from the revenues generated by the financed project?
- General obligation bond
- Tax increment financing bond
- Special assessment bond
- Revenue bond (Correct answer)
Correct answer: Revenue bond
Revenue bonds are backed exclusively by the income generated by the specific project (e.g., a utility or toll road) and do not pledge the municipality's taxing power.
Question 4: What is tax increment financing (TIF) primarily used for in municipal government?
- Reducing property tax rates in blighted areas
- Funding redevelopment projects using future property tax growth in a designated district (Correct answer)
- Issuing short-term notes to cover cash flow deficits
- Financing employee pension obligations
Correct answer: Funding redevelopment projects using future property tax growth in a designated district
TIF captures the increase in property tax revenues that results from redevelopment within a designated district to repay bonds or fund improvements in that area.
Question 5: Which purchasing method is most appropriate for a municipality acquiring a unique, highly technical engineering service?
- Invitation for bids (IFB)
- Request for proposals (RFP) (Correct answer)
- Sole source procurement
- Cooperative purchasing agreement
Correct answer: Request for proposals (RFP)
An RFP is used when the scope of work is complex or technical and quality/methodology matter, allowing evaluation of qualifications beyond just price.
Question 6: What is the primary distinction between an operating budget and a capital budget?
- Operating budgets require voter approval; capital budgets do not
- Operating budgets fund recurring day-to-day expenses; capital budgets fund long-lived assets and infrastructure (Correct answer)
- Capital budgets are funded by property taxes; operating budgets are funded by fees
- Operating budgets span multiple years; capital budgets are adopted annually
Correct answer: Operating budgets fund recurring day-to-day expenses; capital budgets fund long-lived assets and infrastructure
Operating budgets cover ongoing costs like salaries and supplies, while capital budgets finance major assets (buildings, roads, equipment) with useful lives exceeding one year.
CMM CMM Financial Management & Budgeting 2
Which method of capital budgeting analysis calculates the time required for cumulative project savings to equal the initial investment?