Governmental Financial Management
CGFM Study Guide 3 Exam with Multiple
Choices Questions and Correct
Answers Latest 2026-2027
Internal controls should help prevent goods from being stolen. True or false? Answer: -
CORRECT ANSWERS-True. One of the primary functions of internal control systems is to
prevent loss, misuse or misappropriation of assets
Which of the following is inappropriate?
a. The person receiving a deposit makes out the deposit slip.
b. The person making out the deposit slip makes the deposit.
c. The person sending out the bill records the transaction in the system.
d. The person recording transactions reconciles the bank statements. - CORRECT
ANSWERS-(b). The person making the deposit slip has the ability to alter the deposit.
Thus, these are not compatible duties. Often, the person receiving the deposit also makes
out the deposit slip.
A warrant is: a. a request for funds drawn on the treasury of a government.
b. a request for funds drawn on a financial institution regulated by the Federal Reserve
System.
c. a request for funds to cover a ZBA.
d. a request for the payment of a recurring electronic payment. - CORRECT ANSWERS-
(a). A request for funds drawn on a financial institution is a check. A request for funds to
cover a ZBA is an intra-bank transfer. A request for the payment of a recurring electronic
payment is a request for an electronic funds transfer.
Which of the following should not be done through electronic payments?
a. the payroll of the government
b. payments to retirees
c. a payment for a one-time purchase
d. payments for the purchase of investments - CORRECT ANSWERS-(c). The amount of
time involved in setting up an account for an electronic payment would be too costly for a
one-time purchase. This is particularly true if the amount is small.
A government should establish a different bank account for each of its funds. True or false?
- CORRECT ANSWERS-False. A government should concentrate its accounts for
,increased investment potential. The accounting system should be used to track the cash
balances for each fund.
Which of the following is not a duty of the Federal Reserve System? a. guaranteeing direct
loans of the federal government
b. maintaining stability of the financial system
c. conducting monetary policy for the government.
d. supervising and regulating banking institutions - CORRECT ANSWERS-(a). The
Federal Reserve System does not guarantee loans of the federal government. Loans are
guaranteed by agencies of the federal government.
A county government collects funds from property taxes in late December each year. The
county releases property taxes collected on behalf of school districts on the following July
1. Which of the following investments would be the most prudent investment of this money
for six months?
a. bond funds
b. commercial paper
c. equities
d. real estate
e. checking account interest - CORRECT ANSWERS-(b). Commercial paper is a short-
term investment instrument, which would be the most appropriate and prudent given the
limited time period. Bond funds are long-term investments, while equities and real estate
have a greater degree of risk. The interest from a checking account would be much less
than the interest from commercial paper.
A county government is able to issue debt securities at an interest rate of 4 percent and can
invest that money in a U.S. government Treasury bill earning 5 percent. Which of the
following could prevent this combined transaction from being profitable?
a. total return b. benchmarking
c. prudent expert rule
d. arbitrage - CORRECT ANSWERS-(d). The federal government has arbitrage
restrictions on the amount that can be earned from investments.
A county government is able to issue debt securities at an interest rate of 4 percent and can
invest that money in a U.S. government Treasury bill earning 5 percent. Which of the
following could prevent this combined transaction from being profitable?
a. total return
b. benchmarking
c. prudent expert rule
d. arbitrage - CORRECT ANSWERS-(d). The federal government has arbitrage
restrictions on the amount that can be earned from investments.
Quotes for over-the-counter securities can be obtained on the:
a. NYSE.
b. NASDAQ.
c. AMEX.
, d. Chicago Board of Trade. - CORRECT ANSWERS-(b). The NASDAQ provides the
quotes for securities that are traded over-the-counter. The other markets provide quotes
only for the securities that are listed on the appropriate exchange.
The prudent expert rule states that:
a. only persons with investment experience should sit on a board.
b. board members must hire investment expertise if such knowledge is not otherwise
available.
c. it is sufficient for board members to be prudent in investing government funds.
d. board members should perform due diligence by reading and understanding investment
manager's reports before the board meetings. - CORRECT ANSWERS-(b). If the
individual or board overseeing the government's investments does not have the
knowledge or experience needed, then the individual or board must acquire competent
individuals or firms to assist in the investment of those funds.
Which of the following investments types is the most liquid? a. equities b. bonds c.
debentures d. STIFs - CORRECT ANSWERS-(d). Short-term investment funds (STIFs)
give governments the flexibility to purchase or redeem investments on a daily basis.
A government has a collateral agreement with its depository bank. The collateral is held in
the bank's trust department. The government is subject to:
a. interest rate risk.
b. liquidity risk.
c. custodial credit risk.
d. systematic risk. - CORRECT ANSWERS-(c). Securities that are not held by the
government or its agent, and particularly if they are not held in the owner's name, have the
greatest custodial credit risk.
The Depository Trust Company is responsible for:
a. facilitating the exchange of ownership of securities.
b. holding collateral as an interested third party.
c. handling Federal Reserve System wire payments.
d. validating the experience and knowledge of investment advisers. - CORRECT
ANSWERS-(a). The Depository Trust Company (DTC) is a central repository through
which members electronically settle trades in corporate, mortgage-backed and municipal
securities, and electronically transfer security certificates.
Explain the difference between direct loans and guaranteed loans - CORRECT
ANSWERS-A direct loan exists when a government agency disburses funds directly to the
borrower and is repaid directly by the borrower. A direct loan becomes an outlay for the
government agency at the time the loan is made.
In a guaranteed loan, the loan to the borrower is made by a qualified lending institution,
such as a bank. In these cases, the agency has a liability and has to expend funds to the
lending institution only if the borrower defaults on the loan
CGFM Study Guide 3 Exam with Multiple
Choices Questions and Correct
Answers Latest 2026-2027
Internal controls should help prevent goods from being stolen. True or false? Answer: -
CORRECT ANSWERS-True. One of the primary functions of internal control systems is to
prevent loss, misuse or misappropriation of assets
Which of the following is inappropriate?
a. The person receiving a deposit makes out the deposit slip.
b. The person making out the deposit slip makes the deposit.
c. The person sending out the bill records the transaction in the system.
d. The person recording transactions reconciles the bank statements. - CORRECT
ANSWERS-(b). The person making the deposit slip has the ability to alter the deposit.
Thus, these are not compatible duties. Often, the person receiving the deposit also makes
out the deposit slip.
A warrant is: a. a request for funds drawn on the treasury of a government.
b. a request for funds drawn on a financial institution regulated by the Federal Reserve
System.
c. a request for funds to cover a ZBA.
d. a request for the payment of a recurring electronic payment. - CORRECT ANSWERS-
(a). A request for funds drawn on a financial institution is a check. A request for funds to
cover a ZBA is an intra-bank transfer. A request for the payment of a recurring electronic
payment is a request for an electronic funds transfer.
Which of the following should not be done through electronic payments?
a. the payroll of the government
b. payments to retirees
c. a payment for a one-time purchase
d. payments for the purchase of investments - CORRECT ANSWERS-(c). The amount of
time involved in setting up an account for an electronic payment would be too costly for a
one-time purchase. This is particularly true if the amount is small.
A government should establish a different bank account for each of its funds. True or false?
- CORRECT ANSWERS-False. A government should concentrate its accounts for
,increased investment potential. The accounting system should be used to track the cash
balances for each fund.
Which of the following is not a duty of the Federal Reserve System? a. guaranteeing direct
loans of the federal government
b. maintaining stability of the financial system
c. conducting monetary policy for the government.
d. supervising and regulating banking institutions - CORRECT ANSWERS-(a). The
Federal Reserve System does not guarantee loans of the federal government. Loans are
guaranteed by agencies of the federal government.
A county government collects funds from property taxes in late December each year. The
county releases property taxes collected on behalf of school districts on the following July
1. Which of the following investments would be the most prudent investment of this money
for six months?
a. bond funds
b. commercial paper
c. equities
d. real estate
e. checking account interest - CORRECT ANSWERS-(b). Commercial paper is a short-
term investment instrument, which would be the most appropriate and prudent given the
limited time period. Bond funds are long-term investments, while equities and real estate
have a greater degree of risk. The interest from a checking account would be much less
than the interest from commercial paper.
A county government is able to issue debt securities at an interest rate of 4 percent and can
invest that money in a U.S. government Treasury bill earning 5 percent. Which of the
following could prevent this combined transaction from being profitable?
a. total return b. benchmarking
c. prudent expert rule
d. arbitrage - CORRECT ANSWERS-(d). The federal government has arbitrage
restrictions on the amount that can be earned from investments.
A county government is able to issue debt securities at an interest rate of 4 percent and can
invest that money in a U.S. government Treasury bill earning 5 percent. Which of the
following could prevent this combined transaction from being profitable?
a. total return
b. benchmarking
c. prudent expert rule
d. arbitrage - CORRECT ANSWERS-(d). The federal government has arbitrage
restrictions on the amount that can be earned from investments.
Quotes for over-the-counter securities can be obtained on the:
a. NYSE.
b. NASDAQ.
c. AMEX.
, d. Chicago Board of Trade. - CORRECT ANSWERS-(b). The NASDAQ provides the
quotes for securities that are traded over-the-counter. The other markets provide quotes
only for the securities that are listed on the appropriate exchange.
The prudent expert rule states that:
a. only persons with investment experience should sit on a board.
b. board members must hire investment expertise if such knowledge is not otherwise
available.
c. it is sufficient for board members to be prudent in investing government funds.
d. board members should perform due diligence by reading and understanding investment
manager's reports before the board meetings. - CORRECT ANSWERS-(b). If the
individual or board overseeing the government's investments does not have the
knowledge or experience needed, then the individual or board must acquire competent
individuals or firms to assist in the investment of those funds.
Which of the following investments types is the most liquid? a. equities b. bonds c.
debentures d. STIFs - CORRECT ANSWERS-(d). Short-term investment funds (STIFs)
give governments the flexibility to purchase or redeem investments on a daily basis.
A government has a collateral agreement with its depository bank. The collateral is held in
the bank's trust department. The government is subject to:
a. interest rate risk.
b. liquidity risk.
c. custodial credit risk.
d. systematic risk. - CORRECT ANSWERS-(c). Securities that are not held by the
government or its agent, and particularly if they are not held in the owner's name, have the
greatest custodial credit risk.
The Depository Trust Company is responsible for:
a. facilitating the exchange of ownership of securities.
b. holding collateral as an interested third party.
c. handling Federal Reserve System wire payments.
d. validating the experience and knowledge of investment advisers. - CORRECT
ANSWERS-(a). The Depository Trust Company (DTC) is a central repository through
which members electronically settle trades in corporate, mortgage-backed and municipal
securities, and electronically transfer security certificates.
Explain the difference between direct loans and guaranteed loans - CORRECT
ANSWERS-A direct loan exists when a government agency disburses funds directly to the
borrower and is repaid directly by the borrower. A direct loan becomes an outlay for the
government agency at the time the loan is made.
In a guaranteed loan, the loan to the borrower is made by a qualified lending institution,
such as a bank. In these cases, the agency has a liability and has to expend funds to the
lending institution only if the borrower defaults on the loan
