CPWM Financial Planning & Budgeting 2 — Questions and Answers
Question 1: Which budgeting approach builds each budget cycle from zero rather than using prior-year actuals as a baseline?
- Incremental budgeting
- Zero-based budgeting (Correct answer)
- Performance-based budgeting
- Line-item budgeting
Correct answer: Zero-based budgeting
Zero-based budgeting requires every expenditure to be justified anew each cycle, eliminating the assumption that prior-year spending levels are appropriate.
Question 2: A public works department wants to recover the full cost of a service from users who directly benefit. This practice is called:
- Tax increment financing
- Full-cost pricing (Correct answer)
- Fund accounting
- Encumbrance accounting
Correct answer: Full-cost pricing
Full-cost pricing ensures that user fees cover all direct and indirect costs, including overhead, depreciation, and debt service associated with providing the service.
Question 3: When a local government issues general obligation bonds to fund infrastructure, repayment is typically secured by:
- Revenue from the specific facility financed
- The full faith and credit (taxing power) of the government (Correct answer)
- Federal grant reimbursements
- Developer impact fees collected over time
Correct answer: The full faith and credit (taxing power) of the government
General obligation bonds pledge the issuer's unlimited taxing authority as security, making them lower-risk than revenue bonds.
Question 4: Which financial ratio best measures a government's ability to pay current obligations from current assets?
- Debt service coverage ratio
- Current ratio (Correct answer)
- Operating margin ratio
- Return on net assets
Correct answer: Current ratio
The current ratio (current assets ÷ current liabilities) indicates short-term liquidity and is a standard measure of a government's ability to meet near-term obligations.
Question 5: Under GASB standards, an enterprise fund is used to account for activities that are:
- Financed primarily through property taxes
- Operated in a manner similar to private business (Correct answer)
- Managed by a separate governmental authority
- Funded exclusively by federal grants
Correct answer: Operated in a manner similar to private business
Enterprise funds apply accrual accounting to government activities that charge fees to external users, similar to how a private business operates.
Question 6: A public works manager receives a budget amendment request mid-year to shift $50,000 from equipment purchases to personnel. This transfer typically requires:
- No action if the total budget is unchanged
- Governing body approval per local ordinance or policy (Correct answer)
- Approval only from the finance director
- Notification to the state auditor within 30 days
Correct answer: Governing body approval per local ordinance or policy
Most jurisdictions require legislative or governing body approval for budget amendments that transfer funds between major object categories or programs.
Question 7: The primary purpose of an encumbrance system in public works financial management is to:
- Record depreciation on capital assets
- Reserve budget authority when a purchase order is issued (Correct answer)
- Allocate overhead costs to departments
- Track grant expenditures by federal category
Correct answer: Reserve budget authority when a purchase order is issued
Encumbrances commit a portion of the budget appropriation when orders are placed, preventing over-expenditure before the actual invoice is received.
CPWM Financial Planning & Budgeting 2
Which budgeting approach builds each budget cycle from zero rather than using prior-year actuals as a baseline?