Question 1

The Financial Accounting Standards Board requires all nongovernmental not-for-profit entities to use fund accounting.

Accepted Answer

The Financial Accounting Standards Board (FASB) does not require all nongovernmental not-for-profit entities to use fund accounting. While fund accounting is a common practice among not-for-profits for internal tracking of designated funds, FASB standards focus on financial statement presentation and do not mandate the use of fund accounting.

Question 2

Which of the following accounts would you least expect to see in a debt service fund?

Accepted Answer

The debt service fund is used to account for the payment of interest and principal on long-term debt. The outstanding balance of the debt is not typically recorded in this fund; it is recorded in the long-term liabilities section of the government-wide financial statements.

Question 3

General funds are established to account for resources legally restricted for specified purposes.

Accepted Answer

General funds are established to account for resources that are not legally restricted for specified purposes. These funds are used for the day-to-day operations of an organization or government entity.

Question 4

Which of the following funds is a fiduciary fund?

Accepted Answer

Agency funds are fiduciary funds, meaning they hold and administer assets on behalf of others, such as a trust or individual. The other options listed are all governmental funds that account for specific activities and transactions of a government entity.

Question 5

What is the primary reason that governmental entities use fund accounting?

Accepted Answer

The primary reason that governmental entities use fund accounting is to promote control and accountability over restricted resources, such as grants and donations, which need to be tracked separately from general operating funds. This helps ensure that these restricted resources are used for their intended purposes and are not commingled with other funds. While fund accounting may be required by some laws or GAAP, the main reason for its use is the need for greater control and accountability over restricted resources.

Question 6

A city receives a donation from a citizen who specifies that the principal must be invested and the earnings must be used to support operations of a city-owned recreational facility.The principal of this gift should be accounted for in which of the following funds?

Accepted Answer

The donation from the citizen specifies that the principal must be invested, which indicates that this fund should be accounted for in a permanent fund.

Question 7

A government may report some of its funds on a full accrual basis.

Accepted Answer

It is possible for a government to report some of its funds on a full accrual basis, which means that revenues and expenses are reported when they are earned or incurred, regardless of when the cash is actually received or paid out. This is typically done for funds that have a long-term focus, such as capital projects or pension funds. However, not all government funds are reported on a full accrual basis, as some may use modified accrual accounting, which only captures transactions when cash is received or paid out.

Question 8

The basis of accounting determines when transactions and events are recognized.

Accepted Answer

The basis of accounting determines the timing of recognizing transactions and events in financial statements. Some common bases of accounting include accrual basis, cash basis, and modified accrual basis.

Question 9

Funds divide a government into functional departments.

Accepted Answer

Funds are financial resources set aside for specific purposes, while the division of a government into functional departments is an organizational structure decision, not directly related to funds.

Question 10

Fiduciary activities should be reported in fund statements, but should be excluded from the government-wide statements.

Accepted Answer

Fiduciary activities are those activities where the government acts as a trustee for assets that belong to others, such as pension funds, investment trusts, or custodial funds. These activities are reported on separate fund statements because the government is acting as a custodian and is not responsible for the underlying assets. As a result, fiduciary activities should not be reported in the government-wide statements that report the government's overall financial position and activities.

Question 11

A fund is

Accepted Answer

A fund is a separate fiscal and accounting entity. It is established to carry out specific activities or to attain certain objectives, and its financial resources are accounted for separately from other funds or entities. The other options (A and C) may not fully capture the nature of a fund.

Question 12

Fund accounting promotes control and accountability over restricted resources.

Accepted Answer

Fund accounting is specifically designed to track and monitor restricted resources, ensuring that they are used appropriately and according to any legal or contractual requirements. This promotes control and accountability over these resources.

Question 13

Basis of accounting determines which of the following?

Accepted Answer

Basis of accounting determines when transactions and events are recognized, such as cash basis accounting recognizes transactions when cash is received or paid, while accrual basis accounting recognizes transactions when they occur, regardless of cash flows. The basis does not determine what, where, or why transactions and events will be reported.

Question 14

In addition to preparing fund financial statements, governments should also prepare consolidated financial statements to provide information on the financial position and operating results of the government as a single economic entity.

Accepted Answer

Consolidated financial statements provide a more comprehensive view of the government's financial position and operating results than fund financial statements alone.

Question 15

At first glance, the government-wide statement of activities bears little resemblance to the income statement of a business.

Accepted Answer

The government-wide statement of activities presents the financial activities of the entire government entity, including all programs and departments. It is prepared on an accrual basis and includes non-operating revenues and expenses, such as taxes and grants. In contrast, the income statement of a business usually presents only operating revenues and expenses on a cash or accrual basis. Therefore, the two statements may differ significantly in their presentation and content.

Question 16

In accounting for costs incurred on a major construction project in a capital projects fund, the construction outlays are reported as expenditures, not capital assets.

Accepted Answer

Costs incurred on a major construction project in a capital projects fund are reported as expenditures because they are not considered capital assets until the construction is complete and the asset is placed into service.

Question 17

Which of the following is NOT a governmental fund?

Accepted Answer

Governmental funds are used for activities that are primarily financed through taxes and other government sources. Enterprise funds are used for activities that are intended to be self-supporting through user fees and charges. Therefore, City utilities enterprise fund is not a governmental fund. A, C, and D are all examples of governmental funds that are commonly used by cities.

Question 18

If an entity adopts a full accrual basis of accounting, its measurement focus will automatically be on all economic resources.

Accepted Answer

This statement is true. The full accrual basis of accounting requires that all economic resources and obligations be recognized in the financial statements, regardless of whether cash has been paid or received. Therefore, the measurement focus is on all economic resources.

Question 19

When a governmental entity adopts a basis of accounting other than full accrual and a measurement focus that excludes long-lived assets and liabilities in its governmental fund types:

Accepted Answer

Governmental fund financial statements are prepared using the modified accrual basis of accounting and the current financial resources measurement focus, which excludes long-lived assets and liabilities, in accordance with GAAP.

Question 20

Fiduciary activities only benefit parties other than the government itself.

Accepted Answer

Fiduciary activities involve holding or managing assets on behalf of others, such as trust funds or pension plans. The government is not the beneficiary of these activities, but rather is acting as a trustee or custodian for the benefit of others.

Quiz 2: Fund Accounting