CMO Financial Management & Budgeting 3 — Questions and Answers
Question 1: Which budgeting approach requires each department to justify every dollar of expenditure from zero, regardless of prior year spending?
- Incremental budgeting
- Zero-based budgeting (Correct answer)
- Program budgeting
- Envelope budgeting
Correct answer: Zero-based budgeting
Zero-based budgeting (ZBB) requires departments to build their budgets from scratch each cycle, justifying all expenditures rather than just changes from the prior year.
Question 2: A city's internal auditor discovers that the same employee both approves purchase orders and reconciles vendor invoices. This violates which internal control principle?
- Audit trail documentation
- Segregation of duties (Correct answer)
- Budget allotment
- Encumbrance accounting
Correct answer: Segregation of duties
Segregation of duties requires that no single individual control all aspects of a financial transaction to reduce fraud and error risk.
Question 3: What is the purpose of an actuarial valuation for a municipal pension fund?
- To determine the current market value of pension investments
- To calculate the present value of future pension obligations and required contributions (Correct answer)
- To audit investment manager performance
- To set the employee contribution rate by statute
Correct answer: To calculate the present value of future pension obligations and required contributions
An actuarial valuation uses demographic and economic assumptions to estimate the present value of future benefit payments and determine the annual required contribution.
Question 4: Under the modified accrual basis of accounting, revenues are recognized when they are:
- Earned, regardless of collection timing
- Received in cash
- Available and measurable (Correct answer)
- Appropriated by the governing body
Correct answer: Available and measurable
Modified accrual recognizes revenue when it is both measurable (can be reasonably estimated) and available (collectible within the current period or soon enough to pay current liabilities).
Question 5: A municipality issues tax anticipation notes (TANs) primarily to:
- Finance long-term capital infrastructure
- Bridge short-term cash flow gaps before property tax receipts arrive (Correct answer)
- Refund outstanding general obligation bonds at lower rates
- Fund pension obligation shortfalls
Correct answer: Bridge short-term cash flow gaps before property tax receipts arrive
TANs are short-term borrowings used to maintain operations during the period between the start of the fiscal year and the receipt of property tax collections.
Question 6: What is the primary purpose of a Comprehensive Annual Financial Report (CAFR/ACFR)?
- To set the municipality's annual budget
- To provide full public disclosure of a government's financial condition per GAAP (Correct answer)
- To report only the general fund's revenues and expenditures
- To satisfy federal grant compliance requirements
Correct answer: To provide full public disclosure of a government's financial condition per GAAP
The ACFR (formerly CAFR) is a GAAP-based document that provides comprehensive financial disclosure for the entire government entity, not just individual funds.
Question 7: Which GASB concept requires a government to report both short-term funds (governmental funds) and long-term entity-wide information (government-wide statements)?
- Dual-perspective reporting (Correct answer)
- Modified accrual duality
- Full accrual reconciliation
- Interfund elimination
Correct answer: Dual-perspective reporting
GASB 34 introduced dual-perspective reporting requiring both fund-level statements (modified accrual) and government-wide statements (full accrual) in the same ACFR.
CMO Financial Management & Budgeting 3
Which budgeting approach requires each department to justify every dollar of expenditure from zero, regardless of prior year spending?