CPM Government Budgeting & Finance 3 — Questions and Answers
Question 1: What is the primary purpose of a Comprehensive Annual Financial Report (CAFR) or Annual Comprehensive Financial Report (ACFR)?
- To request legislative appropriations for the next fiscal year
- To provide a complete picture of a government's financial condition to stakeholders (Correct answer)
- To document internal control weaknesses found during audits
- To calculate the tax levy for the upcoming year
Correct answer: To provide a complete picture of a government's financial condition to stakeholders
The ACFR (formerly CAFR) is a thorough, detailed financial report that goes beyond minimum GAAP requirements to provide transparency about a government's financial health.
Question 2: When a local government transfers money from its general fund to a capital projects fund, this transaction is recorded as:
- An expenditure in the general fund and a revenue in the capital projects fund
- An interfund transfer out in the general fund and an interfund transfer in the capital projects fund (Correct answer)
- A loan from the general fund to the capital projects fund
- A budget amendment requiring legislative approval
Correct answer: An interfund transfer out in the general fund and an interfund transfer in the capital projects fund
Interfund transfers are flows of resources between funds without direct equivalent exchange, recorded as transfers out and transfers in respectively to avoid double-counting revenues and expenditures.
Question 3: Which budget format focuses on organizational goals and measures the outputs and outcomes of government programs?
- Line-item budget
- Object-of-expenditure budget
- Performance-based budget (Correct answer)
- Allotment budget
Correct answer: Performance-based budget
Performance-based budgeting ties funding allocations to program outcomes and results, emphasizing what government achieves rather than simply what it spends money on.
Question 4: A government anticipates a $2 million budget shortfall mid-year. Which action would typically NOT require legislative approval?
- Increasing the property tax rate
- Issuing new general obligation bonds
- Implementing a hiring freeze (Correct answer)
- Transferring surplus funds between major programs
Correct answer: Implementing a hiring freeze
Administrative actions like hiring freezes are typically within executive authority, while tax rate changes, bond issuance, and major fund transfers generally require legislative authorization.
Question 5: What does the modified accrual basis of accounting recognize revenue when?
- Cash is received by the government
- It is earned, regardless of when received
- It is available and measurable (Correct answer)
- The budget is formally adopted
Correct answer: It is available and measurable
Under modified accrual accounting used for governmental funds, revenues are recognized when they are both measurable and available to finance current-period expenditures.
Question 6: A city's debt service coverage ratio is 1.2. What does this indicate?
- The city has $1.20 in assets for every $1.00 of debt
- The city's revenues cover debt payments 1.2 times, leaving a modest cushion (Correct answer)
- The city is technically insolvent
- The city can issue 1.2 times more debt before reaching its legal limit
Correct answer: The city's revenues cover debt payments 1.2 times, leaving a modest cushion
A debt service coverage ratio of 1.2 means revenues exceed debt obligations by 20%, indicating the government can meet debt payments but has limited surplus capacity.
Question 7: Which of the following best describes the 'pay-as-you-go' (PAYGO) principle in capital financing?
- Borrowing money upfront and repaying it over the asset's useful life
- Funding capital projects entirely from current revenues without borrowing (Correct answer)
- Using federal grants to avoid local debt
- Refinancing existing debt at lower interest rates
Correct answer: Funding capital projects entirely from current revenues without borrowing
PAYGO capital financing avoids debt by using current-period revenues to fund capital improvements, which eliminates interest costs but requires accumulating sufficient reserves.
CPM Government Budgeting & Finance 3
What is the primary purpose of a Comprehensive Annual Financial Report (CAFR) or Annual Comprehensive Financial Report (ACFR)?