GAFRB Examination 2: Governmental Accounting, Financial Reporting and Budgeting (GAFRB) Questions and Answers

Governmental fund accounting uses the modified accrual basis of accounting. Under this basis, revenues are recognized when:

They are measurable (amount can be reasonably determined)

They are available (collectible within the current period or soon enough thereafter to pay current liabilities — typically within 60 days)

This is the key difference from full accrual accounting, which recognizes revenue when it is earned, regardless of when received.

Relevant References:

GASB Statement No. 33 – Accounting and Financial Reporting for Nonexchange Transactions

GASB Statement No. 34 – Fund Accounting and Modified Accrual Basis

GASB Codification Section 1600 – Fund Financial Reporting

Answer: C. recognized when they become measurable and available

A committed fund balance is established when the highest level of decision-making authority (e.g., county board or city council) formally sets aside resources for a specific purpose through resolution or ordinance before the end of the fiscal year.

Since the county board — the highest authority — has set aside $7 million specifically to address a projected budget deficit, the classification should be committed fund balance.

Assigned fund balance (Option B) is typically used when intent is expressed by a lower level of authority (e.g., finance director).

Relevant References:

GASB Statement No. 54 – Fund Balance Reporting

GASB Codification Section 1800.176 – Fund Balance Classifications

GFOA Guidance on Fund Balance Policies

Answer: D. Committed Fund Balance

Exchange and exchange-like transactions occur when each party receives and gives up essentially equal value. In the case of operating permits (e.g., business licenses or environmental permits), the payer receives a direct and proportional benefit in exchange for the fee paid, making this an exchange-like transaction.

In contrast:

Income taxes and fines are non-exchange revenues.

Grants may or may not be exchange-like, depending on stipulations, but generally are non-exchange.

Relevant Standards and References:

GASB Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions

GASB Codification Section N50, Nonexchange Transactions

GFOA Best Practices – Revenue Recognition

Therefore, Option B is correct.

The "pass back" is a step in the federal budget process during which the Office of Management and Budget (OMB) communicates to federal agencies what parts of their budget requests it has approved or rejected. It precedes the preparation of the President’s Budget and gives agencies a chance to appeal decisions before final submission.

Other options:

Allotment: An internal division of an appropriation.

Rescission: A cancellation of budget authority.

Apportionment: OMB’s formal distribution of funds over time, typically quarterly.

Relevant References:

OMB Circular A-11 – Preparation, Submission, and Execution of the Budget

GAO Glossary of Budgetary Terms

Congressional Budget Office (CBO) – Federal Budget Process

Answer: A. pass back

The unobligated balance of an appropriation refers to the portion of the total appropriation authority that has not yet been committed (obligated) through contracts, purchase orders, or other legally binding agreements.

Formula:

Unobligated Balance = Total Appropriation – Total Obligations

This is a key control metric in federal and state financial management, used to determine how much funding remains legally available for future obligations.

Relevant Standards and References:

OMB Circular A-11, Section 20.3

GAO Principles of Federal Appropriations Law (Red Book)

FASAB SFFAS No. 7: Reporting on Budgetary Resources

Therefore, Option A is correct.

For state and local governments, GASB (Governmental Accounting Standards Board) is the authoritative standard-setting body. If a GASB principle exists, it must be followed, even if a FASB (Financial Accounting Standards Board) principle suggests a different approach.

FASB guidance may only be used in the absence of applicable GASB guidance — and even then, only when it does not conflict with governmental accounting objectives.

Relevant References:

GASB Statement No. 76 – The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments

GASB Concepts Statements

GAO and GFOA Reporting Manuals

Answer: A. the principle established by GASB

When a government issues purchase orders, it records encumbrances to reflect commitments against appropriations. This helps track budgetary commitments and avoid overspending.

The entry is recorded in the budgetary accounts (not proprietary accounts) as follows:

Debit Encumbrances: Recognizes the commitment

Credit Budgetary Fund Balance (or Reserve for Encumbrances): Reflects that part of the fund balance is committed

This is consistent with modified accrual accounting and standard governmental fund practice.

Relevant References:

GASB Codification Section 1300 – Budgetary Accounting

GFOA Best Practices – Encumbrance Accounting

GAO Principles of Appropriation Law – Encumbrance Controls

Answer: D. Debit Encumbrances $427,000; Credit Budgetary Fund Balance $427,000

Comprehensive Detailed Explanation:

A contingent liability is a potential obligation that may arise depending on the outcome of a future event. A building containing asbestos represents a situation where a liability may be incurred if the asbestos must be removed due to safety regulations, public health concerns, or legal requirements.

Unlike realized losses (e.g., from asset sales or impairments), contingent liabilities depend on future events and uncertainty.

Relevant References:

FASAB SFFAS No. 5 – Accounting for Liabilities of the Federal Government

GASB Statement No. 62 – Codification of Accounting and Financial Reporting Guidance

GAO Red Book – Contingent Liabilities Examples

Answer: B. building with asbestos

Comprehensive Detailed Explanation:

Object classes categorize federal government obligations by the type of goods or services purchased, such as personnel compensation, equipment, travel, etc. These are standardized in OMB Circular A-11, Section 83.

This classification supports budgeting, analysis, and reporting.

Relevant References:

OMB Circular A-11, Section 83 – Object Classification

USSGL (U.S. Standard General Ledger) Glossary

GAO Glossary of Budget Terms

Answer: B. object classes

Fund Balance with Treasury (FBWT) increases when an agency receives a Treasury warrant. A warrant is the official document issued by the U.S. Treasury that provides budgetary authority to the agency and establishes funds available for obligation and disbursement.

Other options:

Rescission of appropriation → decreases FBWT

Recovery of prior-year obligations → may restore budgetary authority, but not necessarily FBWT

Custodial revenue → collected on behalf of others; not retained by the collecting agency

Relevant References:

Treasury Financial Manual (TFM), Volume I, Part 2, Chapter 5100

FASAB SFFAS No. 1 – Fund Balance with Treasury

USSGL Guidance on Fund Balance Transactions

Answer: A. receipt of a Treasury warrant

State and local governments adopt legally binding budgets and are required to monitor compliance with those budgets. Budget-to-actual comparisons help ensure that public funds are spent only as authorized by the legislative body. This supports the core accountability principle of public sector financial reporting.

While budgets can also support planning and cash flow, the primary purpose of tracking budgeted vs. actual expenditures is legal compliance.

Relevant References:

GASB Statement No. 34 – Budgetary Comparison Schedules

GFOA – Budget Monitoring and Compliance

GAO Red Book – Legal Requirements for Public Spending

Answer: D. spending conforms to legal requirements.

The city issues $100,000 in general obligation bonds on April 1, 2024, and the first principal payment of $10,000 is due on March 31, 2025. The interest rate is 5% annually on the unpaid principal balance.

As of April 1, 2024, the full $100,000 is outstanding. For the full fiscal year (April 1, 2024 to March 31, 2025), interest accrues on the full amount until payment is made. The interest on $100,000 for one year at 5% =

Interest Expense = $100,000 × 5% = $5,000

Note: Interest is typically calculated on the beginning-of-period balance, and since the payment is made at the end of the year (March 31, 2025), the full $5,000 interest is recognized for that year.

Relevant Standards and References:

GASB Statement No. 34, Basic Financial Statements for State and Local Governments

GASB Codification Section 2200 (Government-Wide Financial Statements)

GFOA Guidance on Long-Term Debt Accounting

In the federal budget execution process:

The Office of Management and Budget (OMB) makes apportionments. These divide appropriated funds into quarterly or program-specific portions to prevent premature spending.

Agencies then make allotments, which further subdivide apportioned funds internally by responsibility centers or programs.

Relevant References:

OMB Circular A-11 – Section 120: Apportionments

Treasury Financial Manual – Fund Control

GAO Red Book – Budget Execution Terminology

Answer: B. apportionments are made by OMB, agencies make allotments

The Statement of Net Cost is the principal financial statement used by federal agencies to report the total cost of their programs and activities. It aligns the agency's programs, outputs, and strategic objectives with the cost incurred to produce those outputs.

The Department of Health and Human Services, like all federal agencies, uses this statement to display costs by major program or responsibility segment.

Relevant References:

FASAB SFFAS No. 4 – Managerial Cost Accounting Standards

FASAB SFFAS No. 55 – Amending the Statement of Net Cost

OMB Circular A-136 – Section on Federal Financial Statements

Answer: A. Statement of Net Cost

The Governmental Accounting Standards Board (GASB) issues accounting standards after a structured due process that includes:

Publication of a Discussion Document (e.g., Preliminary Views)

Publication of an Exposure Draft

Solicitation and analysis of public comments (written/oral)

Deliberation by the full Board

A majority vote (not unanimous) of the GASB board members is required to approve and issue a final standard.

Relevant References:

GASB Rules of Procedure

GASB Due Process Manual

GASB Website – Standard-Setting Process

Answer: D. vote of the majority of board members, after discussing the written and oral comments offered by interested parties on an exposure draft of a statement of proposed standards

A governmental financial reporting entity includes:

The primary government

Legally separate organizations for which the primary government is financially accountable

Other organizations whose exclusion would render the financial statements misleading or incomplete (per GASB Statement No. 14 and No. 61)

Merely keeping records for an organization does not make it part of the financial reporting entity unless there is financial accountability or a significant relationship.

Relevant References:

GASB Statement No. 14 – The Financial Reporting Entity

GASB Statement No. 61 – Omnibus Amendments to GASB No. 14

GASB Codification Section 2100 – Reporting Entity

Answer: B. any organization for which records are kept by the primary government

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Unemployment programs, such as those established by federal law (e.g., Unemployment Insurance), are typically funded through employment taxes and administered through federal trust funds. These funds are earmarked for specific purposes and are deposited into trust fund accounts, which are fiduciary in nature and maintained to provide benefits under the terms of a law or trust agreement.

The Unemployment Trust Fund is a specific example maintained by the U.S. Department of the Treasury.

Relevant References:

FASAB SFFAS No. 27 – Identifying and Reporting Earmarked Funds

Treasury Financial Manual – Trust Fund Accounts

GAO Glossary – Trust Fund Definition

Answer: C. trust funds

 What Are the Four General Government Auditing Standards?

These standards, as defined in theGAO Yellow Book (Government Auditing Standards):

Qualifications:Auditors must have the necessary professional skills and competence to perform their work.

Independence:Auditors must remain free from personal, external, and organizational impairments to maintain objectivity.

Due Professional Care:Auditors must exercise care and diligence, adhering to professional standards and ethical requirements.

Quality Control:Auditors must establish and maintain a system of quality control to ensure audit work meets professional standards.

 Why Is Option D Correct?

These four elements are explicitly outlined in the GAO Yellow Book as the core principles of government auditing standards.

 Why Other Options Are Incorrect:

A. Compliance, timeliness, qualifications, and due professional care:Timeliness and compliance are not part of the four general standards; they are components of audit objectives.

B. Supervision, planning, management controls, and evidence:These are aspects of audit performance, not general standards.

C. Planning, internal controls, independence, and irregularities:Planning and internal controls are part of the audit process, not general standards.

 References and Documents:

GAO Yellow Book (Generally Accepted Government Auditing Standards - GAGAS):Lists qualifications, independence, due professional care, and quality control as the four general standards.

AICPA Audit Standards:Aligns with GAGAS in emphasizing these four principles.

The Federal Financial Management Improvement Act (FFMIA) of 1996 established the requirement for federal agencies to implement and maintain financial systems that comply with federal accounting standards. It formally recognized the Federal Accounting Standards Advisory Board (FASAB) as the source of GAAP for federal agencies.

FASAB’s standards are authoritative for federal entities, much like GASB for state and local governments and FASB for private-sector entities.

Relevant References:

Federal Financial Management Improvement Act of 1996 (Public Law 104–208, Title VIII)

FASAB Handbook – Introduction & Authority

GAO Federal Accounting Standards Overview

Answer: D. FASAB

According to GASB Statement No. 51 – Accounting and Financial Reporting for Intangible Assets, costs associated with internally generated computer software can be capitalized only during the “application development stage.” Activities in this stage that are capitalizable include:

Coding

Software configuration

Testing (for functionality)

Non-capitalizable activities include:

Preliminary project planning (e.g., selecting between alternatives)

Data conversion not necessary for the software to operate

Training employees

Therefore, testing the software for functionality is an activity that should be capitalized.

Relevant References:

GASB Statement No. 51

GFOA Best Practices – Capitalization of Intangible Assets

Answer: C. testing the software for functionality and ease of use

This is the point when a proprietary entry and a budgetary entry must both be recorded:

Proprietary entry: To record the asset (e.g., equipment) and recognize the payable

Budgetary entry: To move from unpaid obligation (Undelivered Orders) to paid obligation (Delivered Orders)

Receiving goods/services triggers both the accrual of the expense and the update of the obligation’s status in the budgetary accounts.

Relevant References:

FASAB SFFAS No. 1 – Accounting for Selected Assets and Liabilities

Treasury Financial Manual, Part 2, Ch. 4700 – Proprietary vs. Budgetary Accounting

GAO Red Book – Appropriations Law

Answer: B. A contracting officer's representative receives delivery of previously ordered printers.

When a payment is made for rent, an expense is incurred and cash is reduced. The correct journal entry is:

Debit Rent Expense $500 → to recognize the cost

Credit Cash $500 → to reflect the cash outflow

Answer: D. debit expense $500, credit cash $500

Relevant References:

FASAB SFFAS No. 4 – Managerial Cost Accounting Concepts and Standards

Basic governmental and commercial accounting journal entry conventions

Comprehensive Detailed Explanation:

According to GASB Statement No. 18 (Accounting for Municipal Solid Waste Landfill Closure and Postclosure Care Costs), governments must recognize a portion of closure and post-closure costs each year as the landfill’s capacity is used.

This is done using the "units-of-consumption" method, meaning costs are accrued in proportion to how much of the landfill's total capacity has been filled. The total estimated cost is spread over the useful life of the landfill.

Relevant References:

GASB Statement No. 18 – Landfill Closure and Postclosure Costs

GASB Codification Section L10.103

GFOA Environmental Liabilities Guidance

Answer: D. each year the landfill is operating

Footnotes (Notes to the Financial Statements) serve to clarify and provide additional detail about the financial statements. Key components include:

Summary of significant accounting policies (e.g., measurement focus, basis of accounting)

Details on capital assets, long-term liabilities, commitments, contingencies

Pension/OPEB disclosures

Not performance metrics or audit opinions (those are in MD&A and audit reports)

Relevant References:

GASB Codification Section 2300 – Notes to Financial Statements

GFOA Best Practices – Financial Reporting and Disclosure

Answer: C. a summary of significant accounting policies.

Serial bonds mature in installments over the life of the bond (e.g., every year or every few years). This structure allows the cost of repaying the debt to align more closely with the periods in which the capital asset is used — achieving intergenerational equity by spreading the cost over the same span as the asset’s useful life.

Term bonds, zero-coupon bonds, and pay-as-you-go do not align costs with benefits across multiple years in the same way.

Relevant References:

GFOA Best Practices – Debt Management and Capital Planning

GASB Concepts Statement No. 1 – Interperiod Equity

MSRB Educational Materials on Bond Types

Answer: A. 30-year serial bonds

A special-purpose government (e.g., a school district, utility authority) is considered a primary government when it meets at least one of the following conditions:

Has a separately elected governing body

Is legally separate

Is fiscally independent of other governments

The reliance on revenue projections from another entity does not preclude a government from being a primary government. What matters is legal and fiscal independence.

Relevant References:

GASB Statement No. 14 – The Financial Reporting Entity

GASB Statement No. 39 and No. 61 (Amendments to Statement 14)

GASB Codification Section 2100 – Defining the Financial Reporting Entity

Answer: A. relies on revenue projections from another government entity

The Federal Accounting Standards Advisory Board (FASAB) establishes Generally Accepted Accounting Principles (GAAP) for federal government entities. FASAB is recognized by the American Institute of Certified Public Accountants (AICPA) as the authoritative source of GAAP for federal agencies.

Other agencies:

OMB: Issues financial reporting guidance and formats (e.g., A-136), but does not set GAAP.

GAO: Audits financial statements and issues internal control guidance.

FASB: Sets GAAP for private sector and some not-for-profit organizations—not federal.

Relevant References:

FASAB Memorandum of Understanding (GAO, Treasury, OMB)

AICPA Rule 203 Designation of FASAB as the GAAP Authority

SFFAS No. 34 – The Hierarchy of GAAP

Answer: A. FASAB

A well-structured budget document typically categorizes spending in three key ways:

Function: Broad purpose or mission, such as public safety, social services, or housing.

Program: Specific activities or initiatives under a function (e.g., housing vouchers under affordable housing).

Object Class: The type of goods or services purchased, such as personnel, supplies, or equipment.

When a budget is organized by items like social services (function), affordable housing (program), and supplies (object class), it indicates the budget is categorized by those three significant elements.

Relevant Standards and References:

OMB Circular A-11, Preparation, Submission, and Execution of the Budget

GAO Budget Glossary

A custodial fund is a type of fiduciary fund used by state and local governments to report assets held temporarily in a purely custodial capacity—for example, taxes collected by one government on behalf of another. These funds do not involve administrative or financial control over the assets; the government is merely acting as an intermediary.

As per GASB Statement No. 84, custodial funds replace agency funds and are used to report fiduciary activities that are not held in a trust agreement and where the government does not have discretion over how the resources are spent.

Relevant Standards and References:

GASB Statement No. 84, Fiduciary Activities

GASB Codification Section 1300: Fiduciary Funds

GFOA Best Practices – Accounting and Financial Reporting for Fiduciary Activities

Therefore, Option A is correct.

Comprehensive Detailed Explanation:

In governmental accounting, an exchange transaction occurs when each party receives and gives up essentially equal value. Exchange-like transactions are similar but may lack one or more of the characteristics of a pure exchange (e.g., pricing may not be market-based).

Examples:

A city charges fees for utilities: the user pays for services and the city provides equivalent value.

Grants and taxes are nonexchange transactions because the payer does not receive a direct, equivalent benefit in return.

Relevant References:

GASB Statement No. 33 – Accounting and Financial Reporting for Nonexchange Transactions

GASB Concepts Statement No. 4 – Elements of Financial Statements

Answer: B. receives value and gives up essentially the same value.

Comprehensive Detailed Explanation:

Budget authority is the legal authorization provided by Congress that allows federal agencies to enter into obligations that will result in outlays, either immediately or in the future. It is a prerequisite for agencies to spend federal funds.

Commitment authority is not an official federal term; transfer authority allows movement of funds between accounts and is more restrictive; expenditure authority is an informal term and not defined in U.S. Code.

Relevant References:

U.S. Code Title 31 – § 1341 and § 1102

GAO Red Book – Budget Concepts

OMB Circular A-11, Section 20 – Budget Authority Definition

Answer: B. a budget authority