CMFO Review Exam: Practice Questions & Explained Answers
Section 1: Governmental Accounting & Reporting (GAAP/GASB)
1. The primary reason why governmental entity financial statements differ from
those of for-profit businesses is:
a) Governments are not required to have their statements audited.
b) Governments use the cash basis of accounting for all funds.
c) The need to demonstrate operational accountability and fiscal accountability.
d) Governments do not have net income or shareholders.
Answer: c) The need to demonstrate operational accountability and fiscal
accountability.
Explanation: For-profit businesses focus on profitability for investors. Governments
must show they are a) fiscally accountable (did they spend money according to public
laws/budgets?) and b) operationally accountable (how efficient and effective are their
services?). This leads to fund accounting and government-wide statements.
2. Which of the following funds is a proprietary fund?
a) General Fund
b) Special Revenue Fund
c) Debt Service Fund
d) Internal Service Fund
Answer: d) Internal Service Fund
Explanation: Proprietary funds account for business-like activities. The two types
are Enterprise Funds (services to the public, e.g., water utility) and Internal Service
Funds (services to other government departments, e.g., IT or motor pool). The General,
Special Revenue, and Debt Service funds are all Governmental Funds.
, 3. Under GASB Statement No. 34, the government-wide financial statements are
prepared using:
a) The current financial resources measurement focus and modified accrual basis of
accounting.
b) The current financial resources measurement focus and accrual basis of accounting.
c) The economic resources measurement focus and modified accrual basis of
accounting.
d) The economic resources measurement focus and accrual basis of accounting.
Answer: d) The economic resources measurement focus and accrual basis of
accounting.
Explanation: Government-wide statements aim to show the "big picture" of the
government's financial position, similar to a private company. This requires the accrual
basis (recognizing revenues when earned and expenses when incurred, regardless of
cash flow) and the economic resources focus (which includes all assets, including
capital assets and long-term liabilities).
4. A capital projects fund would most likely be used to account for:
a) The ongoing maintenance of city parks.
b) The construction of a new public library.
c) The repayment of general obligation bonds.
d) The operations of the city's sanitation department.
Answer: b) The construction of a new public library.
Explanation: Capital Projects Funds are used to account for and report financial
resources that are restricted, committed, or assigned to expenditure for major capital
facilities or assets (like buildings, roads, bridges).
5. The key difference between "modified accrual" and "full accrual" accounting
most often involves the recognition of:
a) Salaries payable.
, b) Long-term debt.
c) Property tax revenues.
d) Capital assets.
Answer: c) Property tax revenues.
Explanation: Under the modified accrual basis (used for governmental funds),
revenues are recognized when they become measurable and available. "Available"
means they are collected within the current period or soon enough thereafter to pay
current-period liabilities (usually within 60 days). For property taxes, this might mean a
different recognition point than under full accrual. Under full accrual, revenues are
recognized when earned, with no "availability" criterion.
Section 2: Budgeting & Fiscal Management
6. A budget that starts with the previous year's appropriation and requires
justification for any increases is known as a:
a) Zero-Based Budget (ZBB)
b) Performance-Based Budget
c) Incremental Budget
d) Capital Budget
Answer: c) Incremental Budget
Explanation: Incremental budgeting is the most common approach. It uses the prior
period's budget as a base and focuses on justifying changes (increments or
decrements). It is relatively simple but can perpetuate past inefficiencies.
7. The primary purpose of a "capital budget" is to:
a) Plan for the day-to-day operating expenses of the government.
b) Plan for long-term investments in major infrastructure and assets.
c) Detail the sources and uses of funds for debt service payments.
d) Manage the cash flow for payroll and accounts payable.
Section 1: Governmental Accounting & Reporting (GAAP/GASB)
1. The primary reason why governmental entity financial statements differ from
those of for-profit businesses is:
a) Governments are not required to have their statements audited.
b) Governments use the cash basis of accounting for all funds.
c) The need to demonstrate operational accountability and fiscal accountability.
d) Governments do not have net income or shareholders.
Answer: c) The need to demonstrate operational accountability and fiscal
accountability.
Explanation: For-profit businesses focus on profitability for investors. Governments
must show they are a) fiscally accountable (did they spend money according to public
laws/budgets?) and b) operationally accountable (how efficient and effective are their
services?). This leads to fund accounting and government-wide statements.
2. Which of the following funds is a proprietary fund?
a) General Fund
b) Special Revenue Fund
c) Debt Service Fund
d) Internal Service Fund
Answer: d) Internal Service Fund
Explanation: Proprietary funds account for business-like activities. The two types
are Enterprise Funds (services to the public, e.g., water utility) and Internal Service
Funds (services to other government departments, e.g., IT or motor pool). The General,
Special Revenue, and Debt Service funds are all Governmental Funds.
, 3. Under GASB Statement No. 34, the government-wide financial statements are
prepared using:
a) The current financial resources measurement focus and modified accrual basis of
accounting.
b) The current financial resources measurement focus and accrual basis of accounting.
c) The economic resources measurement focus and modified accrual basis of
accounting.
d) The economic resources measurement focus and accrual basis of accounting.
Answer: d) The economic resources measurement focus and accrual basis of
accounting.
Explanation: Government-wide statements aim to show the "big picture" of the
government's financial position, similar to a private company. This requires the accrual
basis (recognizing revenues when earned and expenses when incurred, regardless of
cash flow) and the economic resources focus (which includes all assets, including
capital assets and long-term liabilities).
4. A capital projects fund would most likely be used to account for:
a) The ongoing maintenance of city parks.
b) The construction of a new public library.
c) The repayment of general obligation bonds.
d) The operations of the city's sanitation department.
Answer: b) The construction of a new public library.
Explanation: Capital Projects Funds are used to account for and report financial
resources that are restricted, committed, or assigned to expenditure for major capital
facilities or assets (like buildings, roads, bridges).
5. The key difference between "modified accrual" and "full accrual" accounting
most often involves the recognition of:
a) Salaries payable.
, b) Long-term debt.
c) Property tax revenues.
d) Capital assets.
Answer: c) Property tax revenues.
Explanation: Under the modified accrual basis (used for governmental funds),
revenues are recognized when they become measurable and available. "Available"
means they are collected within the current period or soon enough thereafter to pay
current-period liabilities (usually within 60 days). For property taxes, this might mean a
different recognition point than under full accrual. Under full accrual, revenues are
recognized when earned, with no "availability" criterion.
Section 2: Budgeting & Fiscal Management
6. A budget that starts with the previous year's appropriation and requires
justification for any increases is known as a:
a) Zero-Based Budget (ZBB)
b) Performance-Based Budget
c) Incremental Budget
d) Capital Budget
Answer: c) Incremental Budget
Explanation: Incremental budgeting is the most common approach. It uses the prior
period's budget as a base and focuses on justifying changes (increments or
decrements). It is relatively simple but can perpetuate past inefficiencies.
7. The primary purpose of a "capital budget" is to:
a) Plan for the day-to-day operating expenses of the government.
b) Plan for long-term investments in major infrastructure and assets.
c) Detail the sources and uses of funds for debt service payments.
d) Manage the cash flow for payroll and accounts payable.
