Governmental and Non-profit Accounting
Exam #1
Test Bank Study Questions
MULTIPLE CHOICE (CHAPTER 1)
Topic: Operating Environment
LO: 1
1. Which of the following is a distinguishing characteristic of a nonprofit organization?
a. Its revenues do not exceed its expenses
b. There is an absence of ownership interests that can be sold, transferred, or redeemed
c. It does not depreciate its capital assets
d. It does not charge fees for any of its services
Answer: B
Rationale: Nonprofit organizations, unlike business enterprises, lack ownership interests. Therefore, they
do not engage in ownership-type transactions, such as issuing stock and paying dividends.
Topic: Operating Environment
LO: 1
2. Which of the following activities is performed by state and local governments but not nonprofit
organizations?
a. Issuing federal tax-exempt debt
b. Receiving grants
c. Preparing budgets
d. Providing services to constituents
Answer: A
Rationale: A unique characteristic of state and local governments is that they can issue debt whose
interest is free of federal income tax. State and local governments and nonprofit organizations receive
grants, prepare budgets, and provide services to constituents.
Topic: Operating Environment
LO: 1
3. Which of the following is a reason that governmental accounting is different from business accounting?
a. Governments provide services.
b. Governments are expected to have a long-life.
c. Governments have budgets.
d. Governments may have liabilities
Answer: B
Rationale: The long-life of governments, as compared to business enterprises, is a reason that
governmental accounting is different. To illustrate, the GASB allows the difference between projected and
actual earnings for pension investments to be reported as either as deferred inflows of resources or
1
, deferred outflows of resources and recognized as an expense over a fiveyear period rather than being
reported immediately as an expense. This will be discussed in more detail in Chapter 8.
Topic: Operating Environment
LO: 1
4. Most of the revenues obtained by most governments come from:
a. Taxes
b. Sales of goods or services
c. Borrowing
d. All of the above.
Answer: A
Rationale: Governments obtain most of their revenues from various types of taxes. Of course, borrowing
does not result in revenue. Although a few governments obtain a large portion of their revenues from the
sale of goods or services—such as a government-owned utilities or hospitals —the largest source of
revenues for states, cities, counties, and most other governments is taxes.
Topic: Operating Environment
LO: 1
5. Which of the following is a major source of resources for many nonprofits, but not for businesses or
governments?
a. Donor contributions
b. Taxes
c. Sales of goods to consumers
d. Sale of stock
Answer: A
Rationale: Donor contributions are significant source of revenues for many nonprofits. Some
governments receive donations, but generally, not to the extent of nonprofits. A government’s major
source of revenue generally is various types of taxes. Businesses receive most of their revenue from the
sale of goods or services.
Topic: Operating Environment
LO: 1
6. A nonprofit organization performs all of the following activities except
a. Charging a fee for services provided
b. Paying dividends to shareholders
c. Purchasing long-lived (capital) assets
d. Paying overtime to employees
Answer: B
Rationale: Nonprofit organizations, unlike business enterprises, lack ownership interests. Therefore, they
do not engage in ownership-type transactions, such as issuing stock and paying dividends.
Topic: Governmental and Nonprofit Organizations
LO: 1
7. The GASB establishes financial reporting standards for state and local governmental entities. An entity
created by a government possessing one or more of the following characteristics should follow GASB
standards:
a. The power to enact and levy a tax.
b. The power to directly issue debt, for which its interest is exempt from federal taxation.
2
, c. The potential that another government could unilaterally dissolve the entity and assume their assets
and liabilities.
d. Any of the above.
e. Only a and b.
Answer: D
Rationale: The GASB Codification, Section 1000, paragraph .801 explains that any of the above
characteristics indicate that an organization created by a government should be considered a government
for financial reporting purposes.
Topic: Governmental and Nonprofit Organizations
LO: 1
8. An activity that is unique to governments is
a. Budgeting
b. Cash management
c. Levying taxes
d. Advertising
Answer: C
Rationale: Most organizations engage in budgeting, cash management, and advertising. Governments
have the unique ability to levy taxes.
Topic: Operating Environment
LO: 1
9. Nonprofit organizations obtain their revenues primarily from
a. Issuance of bonds
b. Contributions from donors
c. Taxes on personal property
d. Taxes on real property
Answer: B
Rationale: Donor contributions are significant source of revenues for many nonprofits. The issuance of
bonds results in a liability. Nonprofits do not levy taxes on personal or real property.
Topic: Accounting and Financial Reporting Characteristics
LO: 1, 2
10. External governmental financial reporting focuses on which of the following?
a. Calculating profit or loss
b. Protecting investors from fraud
c. Demonstrating accountability
d. Reporting to management
Answer: C
Rationale: Public accountability is an important objective in both the FASAB and GASB’s Concept
Statements
Topic: Accounting and Financial Reporting Characteristics
LO: 2
11. Which basis of accounting is used for the basic governmental functions of state and local governments?
a. Cash basis of accounting
3
, b. Modified accrual basis of accounting
c. Accrual basis of accounting
d. Regulatory basis of accounting
Answer: B
Rationale: The basis of accounting that governments use for their basic functions is the modified accrual
basis of accounting. These functions are reported in governmental-type funds, which are discussed in
more detail beginning in Chapter 2.
Topic: Accounting and Financial Reporting Characteristics
LO: 2
12. Which of the following entities must use fund accounting for external financial reporting purposes?
a. Businesses
b. Nonprofit organizations
c. State and local governments
d. Federal government
e. All of the above
Answer: C
Rationale: The GASB requires both government-wide and fund-based reporting for external financial
reporting purposes.
Topic: Accounting and Financial Reporting Characteristics
LO: 2
13. Which of the following entities must report at both fund-level and entity-wide level?
a. Businesses
b. Nonprofit organizations
c. State and local governments
d. Federal government
e. All of the above
Answer: C
Rationale: The GASB requires both government-wide and fund-based reporting for external financial
reporting purposes.
Topic: Accounting and Financial Reporting Characteristics
LO: 2
14. Which of the following entities must report at the entity-wide level?
a. Businesses
b. Nonprofit organizations
c. State and local governments
d. Federal government
e. All of the above
Answer: E
Rationale: The FASAB, FASB, and GASB require financial reporting for the entity as a whole.
Topic: Users and Uses of Accounting Information
LO: 2
15. The major external users of governmental financial reports include:
4
Exam #1
Test Bank Study Questions
MULTIPLE CHOICE (CHAPTER 1)
Topic: Operating Environment
LO: 1
1. Which of the following is a distinguishing characteristic of a nonprofit organization?
a. Its revenues do not exceed its expenses
b. There is an absence of ownership interests that can be sold, transferred, or redeemed
c. It does not depreciate its capital assets
d. It does not charge fees for any of its services
Answer: B
Rationale: Nonprofit organizations, unlike business enterprises, lack ownership interests. Therefore, they
do not engage in ownership-type transactions, such as issuing stock and paying dividends.
Topic: Operating Environment
LO: 1
2. Which of the following activities is performed by state and local governments but not nonprofit
organizations?
a. Issuing federal tax-exempt debt
b. Receiving grants
c. Preparing budgets
d. Providing services to constituents
Answer: A
Rationale: A unique characteristic of state and local governments is that they can issue debt whose
interest is free of federal income tax. State and local governments and nonprofit organizations receive
grants, prepare budgets, and provide services to constituents.
Topic: Operating Environment
LO: 1
3. Which of the following is a reason that governmental accounting is different from business accounting?
a. Governments provide services.
b. Governments are expected to have a long-life.
c. Governments have budgets.
d. Governments may have liabilities
Answer: B
Rationale: The long-life of governments, as compared to business enterprises, is a reason that
governmental accounting is different. To illustrate, the GASB allows the difference between projected and
actual earnings for pension investments to be reported as either as deferred inflows of resources or
1
, deferred outflows of resources and recognized as an expense over a fiveyear period rather than being
reported immediately as an expense. This will be discussed in more detail in Chapter 8.
Topic: Operating Environment
LO: 1
4. Most of the revenues obtained by most governments come from:
a. Taxes
b. Sales of goods or services
c. Borrowing
d. All of the above.
Answer: A
Rationale: Governments obtain most of their revenues from various types of taxes. Of course, borrowing
does not result in revenue. Although a few governments obtain a large portion of their revenues from the
sale of goods or services—such as a government-owned utilities or hospitals —the largest source of
revenues for states, cities, counties, and most other governments is taxes.
Topic: Operating Environment
LO: 1
5. Which of the following is a major source of resources for many nonprofits, but not for businesses or
governments?
a. Donor contributions
b. Taxes
c. Sales of goods to consumers
d. Sale of stock
Answer: A
Rationale: Donor contributions are significant source of revenues for many nonprofits. Some
governments receive donations, but generally, not to the extent of nonprofits. A government’s major
source of revenue generally is various types of taxes. Businesses receive most of their revenue from the
sale of goods or services.
Topic: Operating Environment
LO: 1
6. A nonprofit organization performs all of the following activities except
a. Charging a fee for services provided
b. Paying dividends to shareholders
c. Purchasing long-lived (capital) assets
d. Paying overtime to employees
Answer: B
Rationale: Nonprofit organizations, unlike business enterprises, lack ownership interests. Therefore, they
do not engage in ownership-type transactions, such as issuing stock and paying dividends.
Topic: Governmental and Nonprofit Organizations
LO: 1
7. The GASB establishes financial reporting standards for state and local governmental entities. An entity
created by a government possessing one or more of the following characteristics should follow GASB
standards:
a. The power to enact and levy a tax.
b. The power to directly issue debt, for which its interest is exempt from federal taxation.
2
, c. The potential that another government could unilaterally dissolve the entity and assume their assets
and liabilities.
d. Any of the above.
e. Only a and b.
Answer: D
Rationale: The GASB Codification, Section 1000, paragraph .801 explains that any of the above
characteristics indicate that an organization created by a government should be considered a government
for financial reporting purposes.
Topic: Governmental and Nonprofit Organizations
LO: 1
8. An activity that is unique to governments is
a. Budgeting
b. Cash management
c. Levying taxes
d. Advertising
Answer: C
Rationale: Most organizations engage in budgeting, cash management, and advertising. Governments
have the unique ability to levy taxes.
Topic: Operating Environment
LO: 1
9. Nonprofit organizations obtain their revenues primarily from
a. Issuance of bonds
b. Contributions from donors
c. Taxes on personal property
d. Taxes on real property
Answer: B
Rationale: Donor contributions are significant source of revenues for many nonprofits. The issuance of
bonds results in a liability. Nonprofits do not levy taxes on personal or real property.
Topic: Accounting and Financial Reporting Characteristics
LO: 1, 2
10. External governmental financial reporting focuses on which of the following?
a. Calculating profit or loss
b. Protecting investors from fraud
c. Demonstrating accountability
d. Reporting to management
Answer: C
Rationale: Public accountability is an important objective in both the FASAB and GASB’s Concept
Statements
Topic: Accounting and Financial Reporting Characteristics
LO: 2
11. Which basis of accounting is used for the basic governmental functions of state and local governments?
a. Cash basis of accounting
3
, b. Modified accrual basis of accounting
c. Accrual basis of accounting
d. Regulatory basis of accounting
Answer: B
Rationale: The basis of accounting that governments use for their basic functions is the modified accrual
basis of accounting. These functions are reported in governmental-type funds, which are discussed in
more detail beginning in Chapter 2.
Topic: Accounting and Financial Reporting Characteristics
LO: 2
12. Which of the following entities must use fund accounting for external financial reporting purposes?
a. Businesses
b. Nonprofit organizations
c. State and local governments
d. Federal government
e. All of the above
Answer: C
Rationale: The GASB requires both government-wide and fund-based reporting for external financial
reporting purposes.
Topic: Accounting and Financial Reporting Characteristics
LO: 2
13. Which of the following entities must report at both fund-level and entity-wide level?
a. Businesses
b. Nonprofit organizations
c. State and local governments
d. Federal government
e. All of the above
Answer: C
Rationale: The GASB requires both government-wide and fund-based reporting for external financial
reporting purposes.
Topic: Accounting and Financial Reporting Characteristics
LO: 2
14. Which of the following entities must report at the entity-wide level?
a. Businesses
b. Nonprofit organizations
c. State and local governments
d. Federal government
e. All of the above
Answer: E
Rationale: The FASAB, FASB, and GASB require financial reporting for the entity as a whole.
Topic: Users and Uses of Accounting Information
LO: 2
15. The major external users of governmental financial reports include:
4
