Chapter 4

Question 1

Which of the following is a fund category?
A. Internal service funds
B. Business-type activities
C. Fiduciary funds
D. All of the above

Answer 1

There are three basic categories of funds (v. fund types): governmental funds, proprietary funds, and fiduciary funds. [Correct response = C

Question 2

Which of the following most likely would be reported in a proprietary fund?
A. Taxes
B. Grants
C. Fees and charges
D. Resources held in trust

Answer 2

Proprietary funds are used to account for activities that receive significant support from fees and charges. Taxes and grants are most commonly associated with governmental funds, while resources held in trust are accounted for in fiduciary funds. [Correct response = C]

Question 3

What is the maximum number of fund types that an individual government could report?
A. 5
B. 7
C. 11
D. There is no maximum number.

Answer 3

5 governmental fund types + 2 proprietary fund types + 4 fiduciary fund types = 11 fund types. [Correct response = C

Question 4

For which of the following fund types, if any, is there a specific limit on the number of individual funds that may be reported?
A. Special revenue funds
B. Internal service funds
C. Enterprise funds
D. Custodial funds
E. None of the above

Answer 4

A government may report one, and only one, general fund. Otherwise, the number of individual funds of any given fund type depends on the practical application of the number of funds principle. [Correct response = E]

Question 5

Which of the following fund types must be reclassified whenever a component unit is blended into the financial statements of its primary government?
A. General fund
B. Enterprise funds
C. Internal service funds
D. None of the abo

Answer 5

The general fund of a blended component unit must be reclassified as a special revenue fund when it is incorporated into the primary government of the financial reporting entity. [Correct response = A

Question 6

Which of the following is a precondition for reporting a special revenue fund?
A. Limitation on expenditure imposed by an external party
B. One or more specific revenue source(s)
C. Preponderance of inflows from core source
D. All of the above

Answer 6

At the core of any special revenue fund must be one or more specific revenue sources. Special revenue funds may be used, not only for restricted resources (external limitation on use), but also for committed resources (internal legal limitation on use). The core revenue source of a special revenue fund must be substantial, but not necessarily predominant. [Correct response = B]

Question 7

When is the use of an enterprise fund required?
A. Outstanding debt backed solely by fees and charges
B. Legal requirement that fees and charges be set to recover costs (including capital)
C. Pricing policy that fees and charges be set to recover costs (including capital)
D. All of the above

Answer 7

A given activity must be accounted for in an enterprise fund if (1) there is outstanding debt that is backed solely by fees and charges, or (2) laws or regulations require that fees and charges be set to recover costs, including capital costs, or (3) there is a pricing policy that fees and charges be set to recover costs, including capital costs. [Correct response = D]

Question 8

Which of the following statements is true concerning the use of an internal service fund?
A. The government itself must be the predominant participant.
B. The fund must “break even” each year.
C. Charges must include the cost of capital based on depreciation.
D. All of the above

Answer 8

There is no requirement that an internal service fund “break even” each year, only that it recover its costs over time. Likewise, charges to recover capital costs may be based on debt service or replacement cost, rather than depreciation expense. However, if the predominant users are outside parties, it must be reclassified as an enterprise fund. [Correct response = A]

Question 9

Which of the following best describes the “Number of Funds principle?”
A. Use separate funds for separate activities.
B. Funds in the financial statements should mirror funds in the accounting system.
C. Use as many funds as bank accounts.
D. Use only as many funds as necessary.

Answer 9

Only the minimum number of funds consistent with legal and operating requirements should be established. [Correct response = D

Question 10

Which of the following is not a subcategory of interfund activity?
A. Loans
B. Exchange and exchange-like transactions
C. Transfers
D. Reimbursements
E. None of the above

Answer 10

There are two categories of interfund activity: reciprocal and nonreciprocal. Reciprocal interfund activity is divided into two subcategories: interfund loans and interfund services provided and used. Nonreciprocal interfund activity also is divided into two subcategories: interfund transfers and interfund reimbursements. [Correct response E]

Question 11

Which of the following would appear in a resource flows statement?
A. Loans
B. Reimbursements
C. Transfers
D. All of the above

Answer 11

Increases and decreases in loan balances affect only asset and liability accounts (cash and loans receivable/payable). In a reimbursement, amounts received are treated as a reduction of the amount reported as expenditures/expense rather than as revenue. Transfers, however, are reported as inflows and outflows of resources on the statement of resource flows. [Correct response = C]

Question 12

How would an enterprise fund report the receipt of a capital asset from a department reported in the general fund?
A. Transfer
B. Capital contribution
C. Nonoperating revenue
D. None of the above

Answer 12

Governmental funds do not report capital assets. Thus, if a capital asset used to support a function reported in a governmental fund were later moved to an enterprise fund, only the enterprise fund would have something to report (no interfund activity = no transfer). Consequently, the enterprise fund would report a capital contribution rather than a transfer (revenue can be recognized between funds only in the case of interfund services provided and used). [Correct response = B]

Question 13

How would an enterprise fund report the receipt of a capital asset from another enterprise fund?
A. Transfer
B. Capital contribution
C. Nonoperating revenue
D. None of the above

Answer 13

Enterprise funds report their capital assets. Accordingly, if one enterprise fund donated a capital asset to another enterprise fund, there would be something to report in both funds = interfund activity = transfer. [Correct response = A]

Question 14

How would an enterprise fund report the donation of a capital asset to a department reported in the general fund?
A. Transfer
B. Capital contribution (negative)
C. Loss on disposal (nonoperating expense)
D. None of the above

Answer 14

Governmental funds do not report capital assets. Thus, if a capital asset reported in an enterprise fund were later moved to support an activity reported in the general fund, only the enterprise fund would have something to report (no interfund activity = no transfer). As a result, the enterprise fund would report a loss on disposal, rather than a transfer (there is no such thing as a negative capital contribution). [Correct response = C

Question 15

Which of the following is a false statement about governmental funds?
A. Governmental fund types include: a general fund and capital project, special revenue, and permanent funds.
B. Each individual fund typically represents a separate bank account.
C. A primary government would report the general fund of a blended component unit as a special revenue fund.
D. Only governmental funds report other financing sources and uses.

Answer 15

While funds may originally have represented separate bank accounts used to demonstrate compliance with funding restrictions, accounting systems have advanced to the point where compliance can be demonstrated by use of self-balancing sets of accounts, thus choice B is the false statement and the correct answer to the question. The five governmental fund types are the general fund, special revenue funds, capital projects funds, debt service funds, and permanent funds. The general fund of a blended component unit must be reclassified by the primary government and reported as a special revenue fund. [Correct response = B]

Question 16

Which of the following is a true statement regarding fiduciary funds?
A. Fiduciary fund resources are available to support a government’s own programs.
B. All funds must be held in a trust or equivalent arrangement.
C. Fiduciary funds should never include resources which were earned by the government in exchange or exchange-like transactions.
D. A pension (and other employee benefit) trust fund might be either a GASB PEB trust or a GASB other fiduciary trus

Answer 16

Fiduciary funds should not report resources that are available to support a government’s own programs. Resources held in a fiduciary capacity but not in a trust should be reported in a custodial fund, which is one of four types of fiduciary funds. A government’s own-source revenue may be used to fund a pension or OPEB plan, which are properly reported as pension (and other employee benefit) trust funds. Some pension (and other employee benefit) trust funds, such as an IRS Section 457 plan, may meet the requirements to be a GASB other fiduciary trust rather than a GASB PEB trust. [Correct response = D]

Question 17

Which of the following is a true statement about governmental funds?
A. Permanent fund resources, by definition, are not available to support a government’s own programs.
B. By default, resources not accounted for in some other fund should be reported in the general fund.
C. Inflows should always be reported directly as revenue of the fund in which they are initially collected.
D. If a capital projects fund is used, all capital expenditures should be reported in that fund.
E. The use of a debt service fund is mandatory whenever long-term general obligation debt is outstanding

Answer 17

Unlike a fiduciary fund, a permanent fund’s resources may be available to support a government’s own programs. By definition, the general fund is used to account for and report all financial resources not accounted for and reported in another fund. The core revenue sources of a special revenue fund must be reported as direct revenue of that fund, even if the resources are first received in some other fund and only later remitted to the special revenue fund. In many cases, the acquisition of capital assets is more or less routine from one period to the next (new vehicles for the motor pool). Typically, a capital projects fund is not used for such routine capital outlays, which are reported instead by function in the general fund. Rather, capital projects funds tend to be used primarily for major projects and acquisitions and for capital acquisition or construction financed with borrowed or contributed resources. The essential purpose of a debt service fund is to account for accumulations of resources. Absent such an accumulation (lease), it is common to account for debt service in the general fund rather than in a separate debt service fund. [Correct response = B]

Question 18

The use of an enterprise fund is
A. Permitted for any activity for which a fee is charged.
B. Required for any activity for which a fee is charged.
C. Permitted only if fees are expected to recover at least 50 percent of an activity’s cost.
D. Required only if fees are expected to recover at least 50 percent of an activity’s cos

Answer 18

Enterprise funds may be used for any activity for which a fee is charged. There is no requirement that fees and charges recover a specific percentage of cost to justify the use of enterprise fund accounting, although they must be substantial enough to qualify as the activity’s principle revenue source. Enterprise fund accounting is designed to highlight the extent to which fees and charges are sufficient to cover the cost of providing goods and services. For that reason, it often is used voluntarily for subsidized activities to highlight the cost of the subsidy. [Correct response = A]

Question 19

Which of the following is true regarding investment pools?
A. External investment pools may be reported as either investment trust funds or as custodial funds.
B. The internal portion of investment pools may be reported as either investment trust funds or as custodial funds
C. The external portion of investment pools may be reported as either investment trust funds or as custodial funds.
D. If reported as an investment trust fund, the external portion must be reported in a separate column

Answer 19

Only the external portion of an investment pool may be reported in a fiduciary fund. The remaining resources constitute an internal investment pool and are properly reported as a line item across funds (pooled cash and investments). The external portion of an investment pool that is held in a GASB other fiduciary trust would be reported in an investment trust fund while the external portion of a pool that is not held in a trust would be reported in a separate external investment pool fund column, under the custodial funds classification. [Correct answer = C]

Question 20

Interfund borrowing
A. Is a reciprocal interfund activity.
B. Is a nonreciprocal interfund activity.
C. May need to be reclassified as a transfer.
D. Both A and C
E. Both B and C

Answer 20

A loan is a reciprocal interfund activity because the amount loaned by one fund will be a equal or almost equal value as the amount that will be repaid. A “loan” made without a reasonable expectation of repayment is really a subsidy. Accordingly, “if repayment is not expected within a reasonable time, the interfund balances should be reduced and the amount that is not expected to be repaid should be reported as a transfer from the fund that made the loan to the fund that received the loan.” [Correct response = D]

Question 21

What two things does fund accounting accomplish?

Answer 21

1. Present fairly all activities of the government and,
2. Determines compliance

Question 22

Special revenue funds report…?

Answer 22

…proceeds of specific revenue sources that are either restricted or committed for expenditure for a specific purpose, not debt or capital.

Question 23

When is a government required to report an enterprise fund?

Answer 23

1. When debt is backed by charges or fees
2. Law requires cost recovery
3. Policy requires cost recovery

Question 24

What three things are required of a trust or similar arrangement?

Answer 24

1. Gov cannot be beneficiary
2. Trust can only be used to provide resources to participants per the trust agreement.
3. Trust assets are protected from the government’s creditors.

Question 25

What is required of an investment trust fund?

Answer 25

1. Assets must be comingled
2. External participation
3. Investment purpose
4. Benefits only external participants

Question 26

Which of the following are reciprocal interfund activities?

A. Interfund Loans
B. Transfers
C. Reimbursements
D. Interfund Services
E. B and C
F. A and D
G. All the above

Answer 26

F