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Chapter 2

Overview of Financial Reporting for States & Local Governments


Multiple Choice

Exercise 1: For each of the following, select the letter corresponding with the best answer.

1. Which of the following is not part of the basic financial statements?


a. Government-wide Statement of Net Assets.
b. Proprietary Funds Statement of Revenues, Expenses, and Changes in Fund Net Assets.
c. Combining Balance Sheet—Nonmajor Governmental Funds.
d. Notes to the Financial Statements.

2. Which of the following could be a component unit?


a. The State of Illinois.
b. The City of DeKalb.
c. The Police Department of the City of DeKalb.
d. The DeKalb Public Library.

3. Which of the following is true regarding the Management’s Discussion & Analysis (MD&A)
section of a Comprehensive Annual Financial Report?
a. The MD&A is considered Required Supplementary Information.
b. The MD&A is normally included in the audit scope.
c. The MD&A is part of the Introductory Section of the CAFR.
d. The MD&A has no specific content requirements; the content is entirely up to the
management of the reporting government.

4. Which of the following is true regarding the government-wide financial statements?


a. The government-wide financial statements include the Statement of Net Position and
Statement of Activities.
b. The government-wide financial statements are to be prepared using the economic
resources measurement focus and accrual basis of accounting.
c. The government-wide financial statements include information for governmental
activities, business-type activities, the total primary government, and component
units.
d. All of the above are true.

5. In the government-wide Statement of Net Position:


a. Assets and liabilities must be reported as classified between current and long term.
b. Net position is categorized as reserved and unreserved.
c. Designations of net position may not be presented.
d. Prior-year information must be presented.
6. In the Statement of Activities:
a. All expenses are subtracted from all revenues to get net income.
b. It is possible to determine the net program expense (revenue) for major functions and
programs of the primary government and component units.
c. Some internally generated tax revenues are considered program revenues and others
are considered general revenues.
d. Extraordinary items are those that are either unusual in nature or infrequent in
occurrence.

7. Fund financial statements are to be prepared for which of the following fund categories?
a. Governmental.
b. Fiduciary.
c. Proprietary.
d. All of the above.

8. In the governmental funds Statement of Revenues, Expenditures, and Changes in Fund


Balances:
a. Net position categories are invested in capital assets net of related debt, restricted, and
unrestricted.
b. Expenditures are classified as current, debt service, and capital outlay.
c. Columns are presented for all governmental funds.
d. The end (bottom) of the statement reflects the change in net assets of all funds.

9. Which of the following are the statements required for proprietary funds?
a. Balance Sheet and Statement of Revenues, Expenditures, and Changes in Fund
Balances.
b. Statement of Net Position (or Balance Sheet); Statement of Revenues, Expenses,
and Changes in Net Position; and Statement of Cash Flows.
c. Statement of Net Position (or Balance Sheet); Statement of Revenues, Expenditures,
and Changes in Fund Balance; and Statement of Cash Flows.
d. Statement of Net Position (or Balance Sheet); Statement of Revenues, Expenses, and
Changes in Net Position.

10. Which of the following is true regarding financial reporting under GASB Statement 34?
a. A comparison of budget and actual revenues and expenditures for the General Fund is
required as part of the basic financial statements.
b. Infrastructure must be recorded and depreciated as part of the Statement of Activities
in the basic financial statements.
c. Public colleges and universities are to report in exactly the same manner as private
colleges and universities.
d. Special-purpose governments that have only business-type activities are permitted to
report only the financial statements required for enterprises funds.
Exercise 2: For each of the following, select the letter corresponding with the best answer.

1. Which of the following is not part of the basic financial statements?


a. Governmental funds Statement of Revenues, Expenditures, and Changes in Fund
Balances.
b. Budgetary Comparison Schedules—General and Special Revenue Funds.
c. Government-wide Statement of Activities.
d. Notes to the financial statements.

2. Which of the following is not true regarding GASB requirements pertaining to the financial
reporting entity?
a. In order to be considered a component unit, an entity must be legally separate from its
primary government.
b. The two methods specified for reporting component units are blending and discrete
presentation.
c. An example of reporting entity might be when a county is considered to be a
component unit of a state, the primary government.
d. A component unit might be considered the nucleus for its own reporting entity when it
issues its own financial statements.

3. Which of the following is not true regarding the organization of the Comprehensive Annual
Financial Report (CAFR)?
a. The three major sections are introductory, financial, and statistical.
b. The Management’s Discussion and Analysis (MD&A) is considered to be part of the
Introductory Section.
c. The auditor’s report is considered to be part of the financial section.
d. Basic financial statements include the government-wide statements, the fund financial
statements, and the notes to the financial statements.

4. Which of the following is not true regarding the government-wide financial statements?
a. The government-wide financial statements include the Statement of Net Position and
the Statement of Activities.
b. The government-wide financial statements are prepared on the current financial
resources measurement focus for the governmental activities and the economic
resources measurement focus for business-type activities.
c. Prior-year data may be presented but are not required.
d. Works of art, historical treasures, and similar assets may or may not be capitalized,
depending on whether those assets are determined to be collections.

5. Which of the following would be considered “restricted” in the government-wide Statement


of Net Assets?
a. A contribution to a public university restricted by a donor.
b. A state grant to a municipality restricted by state legislation.
c. A local tax restricted by local legislation to a specific purpose.
d. All of the above.
6. With regard to recording infrastructure by state and local governments:
a. Infrastructure must be recorded and depreciated, unless a modified approach is used,
in which case, depreciation is not required.
b. Infrastructure must be recorded and depreciated in all cases.
c. Infrastructure is not to be recorded and depreciated.
d. State and local governments have the option, but are not required, to record and
depreciate infrastructure.

7. With regard to determining “major” funds for the fund financial statements:
a. The general fund is always considered major.
b. Other funds are considered major if both of the following conditions exist: (1) total
assets, liabilities, revenues, expenditures/expenses of that individual governmental or
enterprise fund constitute 10 percent of the governmental category; and (2) total
assets, liabilities, revenues, expenditures/expenses are 5 percent of the total of the
governmental and enterprise category.
c. A government may choose to reflect a fund as major even if it does not meet the
criteria for major funds.
d. All of the above are true.

8. The fund statements required for fiduciary funds include:


a. Balance Sheet, Statement of Activities.
b. Statement of Net Position; Statement of Revenues, Expenses, and Changes in Net
Position; and State of Cash Flows.
c. Statement of Fiduciary Net Position and Statement of Changes in Fiduciary Net
Position.
d. None of the above; statements are not required for fiduciary funds.

9. Which of the following is not true regarding the notes to the financial statements?
a. Notes are considered part of the basic financial statements.
b. The notes must include a summary of significant accounting policies.
c. The notes include disclosure of the information necessary to use the modified
approach for infrastructure.
d. None of the above; all are true regarding the notes to the financial statements.

10. Regarding special-purpose governments:


a. Special-purpose governments that have more than one governmental activity or that
have both governmental and business-type activities are required to present both
government-wide and fund reporting.
b. Special-purpose governments that have only business-type activities are permitted to
report only those statements required for enterprise funds.
c. Special-purpose governments that are fiduciary only in nature, such as an independent
pension plan, are to prepare only those statements required for fiduciary funds.
d. all of the above are true.