CPM Government Budgeting & Finance 2 — Questions and Answers
Question 1: Which budgeting approach requires each department to justify every expenditure from zero each fiscal year?
- Incremental budgeting
- Zero-based budgeting (Correct answer)
- Program budgeting
- Capital budgeting
Correct answer: Zero-based budgeting
Zero-based budgeting (ZBB) starts from a 'zero base' and requires justification for all expenditures, unlike incremental budgeting which uses the prior year's budget as a baseline.
Question 2: A government's general obligation bonds are backed by:
- Revenue from a specific project
- The full faith and credit of the issuing government (Correct answer)
- Federal grant funds
- A dedicated sales tax
Correct answer: The full faith and credit of the issuing government
General obligation bonds are secured by the issuer's pledge to use legally available resources, including taxing power, to repay bondholders.
Question 3: What is the purpose of an encumbrance in governmental accounting?
- To record actual expenditures paid
- To reserve funds for a contractual obligation not yet paid (Correct answer)
- To transfer funds between departments
- To recognize accrued revenues
Correct answer: To reserve funds for a contractual obligation not yet paid
Encumbrances are commitments of budgetary resources before actual expenditures occur, ensuring funds are reserved for outstanding purchase orders or contracts.
Question 4: The term 'fund balance' in governmental accounting refers to:
- The total amount of outstanding debt
- The difference between fund assets and fund liabilities (Correct answer)
- Annual revenue minus annual expenditures
- Cash held in the treasury
Correct answer: The difference between fund assets and fund liabilities
Fund balance represents the net position of a governmental fund, calculated as total assets and deferred outflows minus total liabilities and deferred inflows.
Question 5: Which of the following is an example of a regressive tax?
- Federal income tax with progressive brackets
- A flat-rate sales tax on consumer goods (Correct answer)
- Estate taxes on large inheritances
- Capital gains taxes on investments
Correct answer: A flat-rate sales tax on consumer goods
A flat-rate sales tax is regressive because lower-income individuals spend a higher proportion of their income on taxable goods, resulting in a greater relative tax burden.
Question 6: In GASB standards, what distinguishes a major fund from a nonmajor fund?
- Major funds are always the general fund and debt service fund
- Major funds meet specific percentage thresholds of total governmental assets, liabilities, revenues, or expenditures (Correct answer)
- Major funds are those with over $1 million in appropriations
- Major funds are determined solely by the governing body
Correct answer: Major funds meet specific percentage thresholds of total governmental assets, liabilities, revenues, or expenditures
GASB Statement 34 defines major funds based on quantitative thresholds — typically 10% of the relevant total and 5% of the aggregate total for all governmental or enterprise funds.
Question 7: A government issues $5 million in revenue bonds to finance a new water treatment facility. Which factor most directly determines the bonds' creditworthiness?
- The government's overall tax base
- The projected revenues from water utility fees (Correct answer)
- The government's existing general fund balance
- The federal government's credit rating
Correct answer: The projected revenues from water utility fees
Revenue bonds are repaid solely from specified revenues generated by the financed project, so the creditworthiness depends primarily on the projected revenue stream from that project.
CPM Government Budgeting & Finance 2
Which budgeting approach requires each department to justify every expenditure from zero each fiscal year?