Question 1

Which of the following is an objective of financial reporting by state and local governments?
A)The same as the objectives of financial reporting by business enterprises.
B)To report on the legal requirements imposed on the government by its elected officials.
C)To provide information that can be used to assess a government's accountability.
D)To fulfill the government's statutory duty to report on cash received and cash disbursed.

Accepted Answer

The objective of financial reporting by state and local governments is to provide information that can be used to assess a government's accountability for its stewardship of public resources. This includes information about financial position, results of operations, cash flows, and other factors that may affect the government's ability to provide services and meet its obligations to citizens. Option A is incorrect because the objectives of financial reporting by state and local governments are different from those of business enterprises. Option B is incorrect because reporting on legal requirements is just one aspect of financial reporting by state and local governments. Option D is incorrect because financial reporting by state and local governments is not limited to reporting on cash received and disbursed, but also includes reporting on other financial information.

Question 2

Fiduciary activities are not reported in the government-wide financial statements under GASB standards.

Accepted Answer

Only governmental and business-type activities are reported on the two government-wide financial statements, the statement of net assets and statement of activities. Fiduciary activities represent assets and liabilities that by definition do not belong to the government. Accordingly, the GASB requires that information about fiduciary activities be excluded from the government-wide financial statements. Fiduciary fund financial information is reported in two fiduciary fund financial statements.

Question 3

Which of the following circumstances would indicate that a potential component unit (PCU)should be included as part of the governmental financial reporting entity?
A)The primary government does not approve the operating budget of the potential component unit.
B)Officials of the primary government appoint a majority of the members of the governing board of the PCU.
C)The PCU has sufficient operational and financial dependence that the primary government can impose its will on the PCU.
D)Officials of the primary government appoint a majority of the members of the PCU's governing board and the primary government is able to impose its will on the PCU.

Accepted Answer

According to GASB 14, a potential component unit should be included as part of the financial reporting entity if the primary government appoints a majority of the members of its governing board and has the ability to impose its will on the potential component unit. Option D is the only choice that meets this requirement. Option A is incorrect because the approval of the budget is not a determining factor. Option B may indicate some level of control, but it is not sufficient on its own. Option C is close, but it does not necessarily indicate that the primary government can impose its will on the potential component unit.

Question 4

Other comprehensive bases of accounting (OCBOA)are considered generally accepted accounting principles (GAAP)for state and local governments.

Accepted Answer

OCBOA are not generally accepted and, if used by a state or local government, are considered special reports that are not intended to conform to GAAP.

Question 5

One of the required reconciliations in converting governmental fund financial statements to governmental activities statements at the government-wide level is to adjust for internal service funds' assets,liabilities,operating income (loss),and transfers.

Accepted Answer

This one of the reconciling items required in converting governmental fund statements to governmental activities statements as presented in Chapter 9.

Question 6

The accounting system used by a state or local government must make it possible to prepare financial statements as required by the Financial Accounting Standards Board.

Accepted Answer

The accounting system must make it possible to present fairly the financial position and results of financial operations of the government as a whole, as well as fund financial activity and compliance with finance-related legal and contractual provisions in conformity with generally accepted accounting principles promulgated by the Government Accounting Standards Board (GASB), not FASB.

Question 7

Which of the following factors would not indicate that a potential component unit (PCU)is dependent on the primary government?
A)The primary government provides advice regarding the PCU's budget.
B)The primary government is obligated to provide financial support to the PCU.
C)The primary government is obligated for the PCU's debt.
D)The primary government is entitled to the PCU's resources.

Accepted Answer

Providing advice regarding the PCU's budget does not indicate dependency, as it does not involve financial obligations or control over resources.

Question 8

A financial reporting entity is defined as a primary government,as well as all other organizations that have an operational relationship with the primary government.

Accepted Answer

GASB standards define a financial reporting entity as a primary government, organizations for which the primary government is financially accountable, and other organizations for which the nature and significance of their relationship with the primary government are such that exclusion would cause the financial statements to be misleading.

Question 9

Statistical tables included in comprehensive annual financial reports should provide social and economic data,in addition to financial data,to assist financial statement users in better understanding the activities and condition of the government.

Accepted Answer

GASB standards require that information should be presented in five categories: (1) financial trends information, (2) revenue capacity information, (3) debt capacity information, (4) demographic and economic information, and (5) operating information.

Question 10

Comprehensive annual financial reports of state and local governments should include (1)an introductory section, (2)a financial section,and (3)a supplemental section.

Accepted Answer

The first two sections are required in GASB standards for a comprehensive annual financial report; however, the third section is a statistical section, not a supplemental section.

Question 11

Under GASB standards,the financial statements that report on business-type activities at the government-wide level include the statement of net assets,statement of activities,and statement of cash flows.

Accepted Answer

The government-wide statements of net assets and statement of activities will have a column to represent business-type activities; however, there is no requirement to present a statement of cash flows in the government-wide statements.

Question 12

The MD&A should provide information that is prospective in nature.

Accepted Answer

Because the MD&A is required supplementary information it should present information based on known facts at the date of the annual report.

Question 13

State and local governments should prepare only those financial reports required by law-generally year-end financial statements.

Accepted Answer

Governments should prepare whatever statements are required by law, but some financial information may be needed daily by administrators. Also, complete interim financial statements are usually desired at regular intervals by administrators, legislators, news media, and others concerned with current information about aspects of the financial management of the unit. Governments concerned with reporting in conformity with GAAP need, as a minimum, to prepare the basic financial statements, notes thereto, and management's discussion and analysis as illustrated and discussed in Chapter 9.

Question 14

GASB reporting objectives emphasize the role of accountability in external financial reporting,and describe accountability as the "paramount objective from which all other objectives must flow."

Accepted Answer

This statement reflects the guidance of GASB Concepts Statement No. 1.

Question 15

Which of the following best describes the GASB financial reporting model for state and local governments?
A)Required comprehensive annual financial reports for all public entities.
B)Integration of government-wide financial reporting and fund accounting.
C)Cash basis accounting.
D)Focus on individual funds.

Accepted Answer

The GASB financial reporting model for state and local governments integrates government-wide financial reporting and fund accounting, which means it looks at both the operations of the entity as a whole and individual funds. It also requires comprehensive annual financial reports but does not use cash basis accounting or focus solely on individual funds.

Question 16

According to the guidance of GASB Concepts Statement 3,financial information can be communicated by recognition in the financial statements,disclosure in the notes to the financial statements,presentation as required supplementary information,or presentation as supplementary information.

Accepted Answer

These are the options provided by GASB Concepts Statement 3 for communicating financial information, as described on p. 354 of the text.

Question 17

In preparation of government-wide statements,converting information recorded using the modified accrual basis of accounting to the accrual basis,where appropriate,is conceptually preferable to using information directly from the accounting system to prepare the statements.

Accepted Answer

It is conceptually better to have government-wide, accrual based accounting information available on demand throughout the year, or at least monthly, to meet the needs of external financial statement users.

Question 18

In converting from the modified accrual basis of accounting information in a governmental fund to accrual basis for the government-wide statements,capital assets acquired by a governmental fund are deducted from fund balance-governmental funds to arrive at net assets of governmental activities.

Accepted Answer

Capital assets acquired by governmental funds are financial uses of resources. As such, in converting to accrual the amount of the capital assets acquired should be added back to total fund balances-governmental funds to arrive at net assets of governmental activities.

Question 19

A component unit is dependent on the primary government if the primary government is obligated for its debt.

Accepted Answer

Other signals that a component unit is dependent upon a primary government include the primary government is entitled to a component unit's resources and the primary government provides financial support to the component unit.

Question 20

Most citizens and financial statement users do not have a clear understanding of the financial reporting entity whose financial position,results of operations,and cash flows are included in an annual financial report.

Accepted Answer

Most citizens and even accountants whose experience is primarily with business sector entities have little understanding of the overlapping layers of general purpose and special purpose governmental organizations that have some jurisdiction over them. The first note to the audited financial statements will include a description of the reporting entity following the criteria established in GASB Codification 2100.

Quiz 9: Financial Reporting of State and Local Governments

Which of the following is an objective of financial reporting by state and local governments?