Facing a revenue shortfall, a city balances its general fund operating budget by issuing ten-year notes and using the proceeds to pay current-year salaries, utilities, and supplies. Measured against the reporting objectives in GASB Concepts Statement 1, what is the most accurate assessment of this practice?

It shifts the cost of current-year services to future taxpayers, so interperiod equity is not achieved

It violates budgetary accountability, but interperiod equity is unaffected because no capital assets are involved

It shifts the cost of current services to past taxpayers, because accumulated fund balance is reduced

It achieves interperiod equity because the budget is legally balanced for the current year

A city is considering outsourcing custodial services. In-house annual costs are salaries and benefits $520,000, supplies $80,000, depreciation of equipment with no resale value $30,000, and allocated central overhead $90,000 that will continue regardless. A contractor bids $640,000 per year, and the city would add $25,000 per year for contract monitoring. What is the annual financial effect on the city of outsourcing?

Total costs increase by $65,000

Total costs increase by $40,000

Total costs decrease by $80,000

Total costs decrease by $55,000

A city council appoints all seven members of the board of a legally separate parking authority. The authority sets its own rates, serves the general public, and issues revenue bonds that are expected to be repaid entirely from parking fees. The city has guaranteed the bonds and would have to pay them if parking revenues fell short. The authority's board is not substantively the same as the council, and the authority does not provide services exclusively or almost exclusively to the city. How should the city report the authority?

As a discretely presented component unit, because the city appoints the board and bears a potential financial burden

As a blended component unit, because the city's guarantee makes the authority's bonds the city's own debt

As an enterprise fund of the city, because the authority finances its operations with fees charged to the public

As a related organization disclosed only in the notes, because the city cannot impose its will on the authority

A capital projects fund issues general obligation bonds with a face amount of 10,000,000 at a price of 10,300,000. Underwriter fees and other issuance costs of 120,000 are withheld from the proceeds. How should the capital projects fund report these items?

Other financing sources of 10,300,000 and expenditures of 120,000

Bonds payable of 10,000,000 and an unamortized premium of 300,000 as fund liabilities

Other financing sources of 10,180,000 and no expenditures

Other financing sources of 10,000,000, revenue of 300,000, and expenditures of 120,000

An agency received a one-year appropriation available for obligation only in Year 1. In Year 8 a vendor submits a valid $40,000 invoice for goods properly obligated and received in Year 1 that was never paid; the Year 1 account had more than $40,000 unexpended when it closed. The agency's current-year appropriation for the same purpose is $5,000,000. How should the agency pay the invoice?

From the current appropriation for the same purpose, since $40,000 is within the 1% limit

From the Year 1 account, after Treasury reinstates the canceled balance at the agency's request

From the Year 1 account's expired balance, which stays available for adjustments for 10 years

From the Treasury Judgment Fund, since the Year 1 account no longer has any available balance

A taxpayer group wants to judge whether a city met its operating objectives efficiently and effectively, using all of its resources, and whether it can continue to meet those objectives. Under the GASB 34 reporting model, which type of accountability is this, and where is it mainly reported?

Operational accountability, reported mainly in the government-wide statements

Operational accountability, reported mainly in the governmental fund statements

Fiscal accountability, reported mainly in the government-wide statements

Fiscal accountability, reported mainly in the budgetary comparison schedules

A county created a legally separate not-for-profit corporation to operate community health clinics, and the county is the corporation's sole corporate member. The corporation's board is not substantively the same as the county commission, the clinics serve the public rather than the county government, and the corporation's debt is repaid from patient fees. The corporation is a component unit of the county. How should it be presented?

As a blended component unit, because the county is its sole corporate member

As a fiduciary component unit, because it holds resources for the clinics' patients

As a discretely presented component unit, because no other blending criterion is met

As a related organization, disclosed only in the notes to the county's statements

In Year 3, a contractor is entitled to a $50,000 in-scope price adjustment on a contract properly obligated against a one-year Year 1 appropriation. The expired Year 1 account has an unobligated balance of $30,000. What is the proper treatment?

Record $30,000 in the expired account; the other $20,000 requires additional appropriated authority

Record $30,000 in the expired account and charge $20,000 to the current Year 3 appropriation for this purpose

Record all $50,000 in the expired account, because adjustments to valid obligations have no limit

Charge all $50,000 to the current Year 3 appropriation, since expired accounts cannot accept new adjustments

CGFM Examination 2

Free CGFM Examination 2 Practice Questions

10 sample questions for the CGFM Examination 2, with the correct answer and an explanation for each. No account needed. Try each one before you open the answer.

Sections covered on the exam: Standards-Setting Bodies and the Accounting Framework, Managerial Cost Accounting, Basic Financial Statements, Federal Funds and Accounting Systems, Governmental Fund Accounting, Federal Accounting Framework, Budgetary and Proprietary Accounting.

Question 1 · Standards-Setting Bodies and the Accounting Framework
Facing a revenue shortfall, a city balances its general fund operating budget by issuing ten-year notes and using the proceeds to pay current-year salaries, utilities, and supplies. Measured against the reporting objectives in GASB Concepts Statement 1, what is the most accurate assessment of this practice?
- A.It violates budgetary accountability, but interperiod equity is unaffected because no capital assets are involved
- B.It shifts the cost of current services to past taxpayers, because accumulated fund balance is reduced
- C.It achieves interperiod equity because the budget is legally balanced for the current year
- D.It shifts the cost of current-year services to future taxpayers, so interperiod equity is not achieved
Show answer and explanation
Answer: D. It shifts the cost of current-year services to future taxpayers, so interperiod equity is not achieved
GASB Concepts Statement 1 defines interperiod equity as whether current-year revenues were sufficient to pay for current-year services; borrowing to pay operating costs means taxpayers in future years will repay debt for services they never receive. A legally balanced budget does not establish interperiod equity, because note proceeds are a financing source rather than revenue. The burden falls on future, not past, taxpayers, since the notes will be repaid from future revenues.
Question 2 · Managerial Cost Accounting
A city is considering outsourcing custodial services. In-house annual costs are salaries and benefits $520,000, supplies $80,000, depreciation of equipment with no resale value $30,000, and allocated central overhead $90,000 that will continue regardless. A contractor bids $640,000 per year, and the city would add $25,000 per year for contract monitoring. What is the annual financial effect on the city of outsourcing?
- A.Total costs increase by $65,000
- B.Total costs increase by $40,000
- C.Total costs decrease by $80,000
- D.Total costs decrease by $55,000
Show answer and explanation
Answer: A. Total costs increase by $65,000
Only avoidable costs are relevant: salaries and benefits plus supplies of $600,000 would cease, while outsourcing would cost $640,000 + $25,000 = $665,000, so total costs rise by $65,000. Comparing the bid with full in-house cost of $720,000 wrongly treats unavoidable overhead and sunk depreciation as savings, producing a false $55,000 or $80,000 decrease. Ignoring the new monitoring cost understates the increase at $40,000.
Question 3 · Basic Financial Statements
A city council appoints all seven members of the board of a legally separate parking authority. The authority sets its own rates, serves the general public, and issues revenue bonds that are expected to be repaid entirely from parking fees. The city has guaranteed the bonds and would have to pay them if parking revenues fell short. The authority's board is not substantively the same as the council, and the authority does not provide services exclusively or almost exclusively to the city. How should the city report the authority?
- A.As a discretely presented component unit, because the city appoints the board and bears a potential financial burden
- B.As a blended component unit, because the city's guarantee makes the authority's bonds the city's own debt
- C.As an enterprise fund of the city, because the authority finances its operations with fees charged to the public
- D.As a related organization disclosed only in the notes, because the city cannot impose its will on the authority
Show answer and explanation
Answer: A. As a discretely presented component unit, because the city appoints the board and bears a potential financial burden
Appointing a voting majority plus a financial burden relationship (the debt guarantee) makes the city financially accountable, so the authority is a component unit (GASB 14 as amended by GASB 61). None of the blending criteria is met: the board differs, services go to the public, and the debt is expected to be repaid from parking fees, so it is discretely presented. A guarantee alone does not trigger blending, and a legally separate organization is never reported as one of the city's own funds.
Question 4 · Governmental Fund Accounting
A capital projects fund issues general obligation bonds with a face amount of 10,000,000 at a price of 10,300,000. Underwriter fees and other issuance costs of 120,000 are withheld from the proceeds. How should the capital projects fund report these items?
- A.Other financing sources of 10,300,000 and expenditures of 120,000
- B.Bonds payable of 10,000,000 and an unamortized premium of 300,000 as fund liabilities
- C.Other financing sources of 10,180,000 and no expenditures
- D.Other financing sources of 10,000,000, revenue of 300,000, and expenditures of 120,000
Show answer and explanation
Answer: A. Other financing sources of 10,300,000 and expenditures of 120,000
Governmental funds report the face amount of long-term debt and any premium as other financing sources, and issuance costs, whether paid or withheld from proceeds, as expenditures (GASB 34). Netting the costs against proceeds understates both inflows and outflows, and a bond premium is not revenue. General long-term debt is not a liability of a governmental fund; it appears only in the government-wide statements.
Question 5 · Governmental Fund Accounting
An agency received a one-year appropriation available for obligation only in Year 1. In Year 8 a vendor submits a valid $40,000 invoice for goods properly obligated and received in Year 1 that was never paid; the Year 1 account had more than $40,000 unexpended when it closed. The agency's current-year appropriation for the same purpose is $5,000,000. How should the agency pay the invoice?
- A.From the current appropriation for the same purpose, since $40,000 is within the 1% limit
- B.From the Year 1 account, after Treasury reinstates the canceled balance at the agency's request
- C.From the Year 1 account's expired balance, which stays available for adjustments for 10 years
- D.From the Treasury Judgment Fund, since the Year 1 account no longer has any available balance
Show answer and explanation
Answer: A. From the current appropriation for the same purpose, since $40,000 is within the 1% limit
The Year 1 account expired at the end of Year 1, stayed in expired status for five fiscal years (Years 2-6), and was canceled at the end of Year 6, so in Year 8 no balance remains. Under 31 U.S.C. 1553(b), obligations chargeable to a canceled account may be paid from a current appropriation for the same purpose, limited to the lesser of the canceled unexpended balance or 1% of the current appropriation ($50,000 here). Canceled balances are not reinstated, the expired phase lasts five years, not ten, and the Judgment Fund pays court judgments, not ordinary invoices.
Question 6 · Standards-Setting Bodies and the Accounting Framework
A taxpayer group wants to judge whether a city met its operating objectives efficiently and effectively, using all of its resources, and whether it can continue to meet those objectives. Under the GASB 34 reporting model, which type of accountability is this, and where is it mainly reported?
- A.Operational accountability, reported mainly in the governmental fund statements
- B.Operational accountability, reported mainly in the government-wide statements
- C.Fiscal accountability, reported mainly in the government-wide statements
- D.Fiscal accountability, reported mainly in the budgetary comparison schedules
Show answer and explanation
Answer: B. Operational accountability, reported mainly in the government-wide statements
GASB 34 describes operational accountability as reporting on how efficiently and effectively the government met its operating objectives using all resources and whether it can continue to do so, which the economic resources, accrual-basis government-wide statements are designed to show. Fiscal accountability concerns whether current-period actions complied with public decisions about raising and spending public money in the short term, and it is the focus of governmental fund statements and budgetary comparisons. Pairing either type with the other set of statements reverses the model's design.
Question 7 · Managerial Cost Accounting
A county jail has unused bed capacity. A neighboring county asks to house 20 inmates for 300 days (6,000 inmate-days). The jail's full cost is $110 per inmate-day, of which $70 is fixed and $40 is variable (food, medical care, supplies). The arrangement would also require one additional officer costing $60,000 for the period. What is the minimum daily charge that avoids a financial loss to the county?
- A.$110 per inmate-day
- B.$50 per inmate-day
- C.$120 per inmate-day
- D.$40 per inmate-day
Show answer and explanation
Answer: B. $50 per inmate-day
With idle capacity, the existing fixed costs will be incurred regardless, so the relevant costs are the variable cost of $40 per day plus the added officer of $60,000 / 6,000 = $10 per day, a minimum of $50. A $40 charge ignores the incremental officer cost. Charging $110 or $120 includes unavoidable fixed costs, which is appropriate for full-cost pricing policies but not for identifying the break-even minimum.
Question 8 · Basic Financial Statements
A county created a legally separate not-for-profit corporation to operate community health clinics, and the county is the corporation's sole corporate member. The corporation's board is not substantively the same as the county commission, the clinics serve the public rather than the county government, and the corporation's debt is repaid from patient fees. The corporation is a component unit of the county. How should it be presented?
- A.As a fiduciary component unit, because it holds resources for the clinics' patients
- B.As a discretely presented component unit, because no other blending criterion is met
- C.As a related organization, disclosed only in the notes to the county's statements
- D.As a blended component unit, because the county is its sole corporate member
Show answer and explanation
Answer: D. As a blended component unit, because the county is its sole corporate member
GASB 80 added a blending criterion: a component unit incorporated as a not-for-profit corporation in which the primary government is the sole corporate member is blended (unless it is included under the GASB 39 fundraising-organization criteria). Because this criterion applies on its own, it does not matter that the board, services, and debt tests in GASB 61 are not met. The corporation runs the clinics for its own operations, so it is not a fiduciary activity, and it is already stated to be a component unit.
Question 9 · Governmental Fund Accounting
The General Fund's payroll for the last month of the year shows gross salaries of 500,000. Withheld from employees were FICA of 38,250 and federal income tax of 70,000. The employer's matching FICA is 38,250, and its required pension contribution is 40,000. All amounts are paid before year-end. What total expenditure does the General Fund report for this payroll?
- A.616,500
- B.500,000
- C.538,250
- D.578,250
Show answer and explanation
Answer: D. 578,250
Expenditures equal gross salaries plus the employer's own costs: 500,000 + 38,250 matching FICA + 40,000 pension contribution = 578,250. Amounts withheld from employees are part of gross pay and are remitted on the employees' behalf, so adding the employee FICA again (616,500) double-counts it. Omitting the pension contribution gives 538,250.
Question 10 · Governmental Fund Accounting
In Year 3, a contractor is entitled to a $50,000 in-scope price adjustment on a contract properly obligated against a one-year Year 1 appropriation. The expired Year 1 account has an unobligated balance of $30,000. What is the proper treatment?
- A.Record $30,000 in the expired account; the other $20,000 requires additional appropriated authority
- B.Record $30,000 in the expired account and charge $20,000 to the current Year 3 appropriation for this purpose
- C.Record all $50,000 in the expired account, because adjustments to valid obligations have no limit
- D.Charge all $50,000 to the current Year 3 appropriation, since expired accounts cannot accept new adjustments
Show answer and explanation
Answer: A. Record $30,000 in the expired account; the other $20,000 requires additional appropriated authority
Under 31 U.S.C. 1553(a), an expired account remains available to record and adjust obligations properly incurred during its period of availability, but only up to its unobligated balance; recording $50,000 against $30,000 would breach the Anti-Deficiency Act. Current appropriations may be used for prior-year obligations only after the original account has been canceled, subject to the 1% limit, so charging Year 3 funds violates the time statute. The $20,000 shortfall needs additional authority, such as a supplemental appropriation.

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