Wilson, Kattelus, and Reck, 14/e, Chapter 9

Chapter 9 Financial Reporting of State and Local Governments

TESTBANK

True/False

1. Most citizens and financial statement users do not have a clear understanding of the financial
reporting entity whose financial position, results of operations, and cash flows are included in
an annual financial report.

2. State and local governments should prepare only those financial reports required by law—
generally year-end financial statements.

3. Comprehensive annual financial reports of state and local governments should include (1) an
introductory section, (2) a financial section, and (3) a supplemental section.

4. The MD&A should provide information that is prospective in nature.

5. Statistical tables included in comprehensive annual financial reports should include only
financial data needed to support information given in the financial statements.

6. A component unit is dependent on the primary government when the primary government is
obligated for its debt.

7. The accounting system used by a state or local government must make it possible to prepare
financial statements as required by the Financial Accounting Standards Board.

8. Under GASBS 34, the financial statements that report on business-type activities at the
government-wide level include the statement of net assets, statement of activities, and
statement of cash flows.

9. GASBS 34 reporting requires combined financial statements as part of the comprehensive

annual financial reports.

10. Fiduciary activities are not reported in the government-wide financial statements under
GASBS 34.

11. Other comprehensive bases of accounting (OCBOA) are considered generally accepted
accounting principles (GAAP) for state and local governments.

12. In converting from the modified accrual basis of accounting information in a governmental
fund to accrual basis for the government-wide statements, capital assets acquired by a
governmental fund are deducted from fund balance—governmental funds to arrive at net
assets of governmental activities.

13. In preparation of government-wide statements, converting information recorded using the

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modified accrual basis of accounting to the accrual basis, where appropriate, is conceptually
desirable.

14. GASB reporting objectives emphasize the role of accountability in external financial
reporting, and describe accountability as the “paramount objective from which all other
objectives must flow.”

15. One of the required reconciliations in converting governmental fund financial statements to
governmental activities statements at the government-wide level is to adjust for internal
service funds’ assets, liabilities, operating income (loss), and transfers.

Multiple Choice

16. What is the objective of financial reporting by state and local governments?

A) The same as the objectives of financial reporting by business enterprises.

B) To report on the legal requirements imposed on the government by its elected officials.
C) To assist governments to discharge their duty to be publicly accountable in a democratic
society.
D) To fulfill the government's statutory duty to report on cash received and cash disbursed.

17. A component unit is dependent on the primary government when the

A) Primary government is entitled to its resources.

B) Primary government is obligated to provide financial support.
C) Primary government is obligated for its debt.
D) All of the above.

18. Which of the following circumstances would indicate that a potential component unit (PCU)
should be included as part of the governmental financial reporting entity?

A) The primary government does not approve the operating budget of the potential
component unit.
B) Officials of the primary government appoint a majority of the members of the governing
board of the PCU.
C) The PCU has sufficient operational and financial dependence that the primary
government can impose its will on the PCU.
D) Both B and C occurring together indicate that the PCU should be included in the
reporting entity.

19. Which of the following best describes the current state of financial reporting for state and
local governments?

A) Required comprehensive annual financial reports for all public entities.

B) Focus on individual funds.
C) Cash basis accounting.

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D) Integration of government-wide financial reporting and fund accounting.

20. Combining financial statements for nonmajor funds of a government should be included in

A) The basic financial statements.

B) The notes to the financial statements.
C) A comprehensive annual financial report (CAFR).
D) Any of the above is acceptable under generally accepted accounting principles (GAAP).

21. Which of the following would not be included within the financial section of the
comprehensive annual financial report (CAFR)?

A) Management's discussion and analysis (MD&A).

B) Management's letter of transmittal.
C) Independent auditor's report.
D) Required supplementary information (RSI).

22. What is the paramount objective of general purpose external financial reporting?

A) Reliability.
B) Relevance.
C) Accountability.
D) Understandability.

23. The responsibility of governments to justify that their actions in the current period have
complied with public decisions concerning the raising and spending of public monies in the
short-term is know as:

A) Operational accountability.
B) Fiduciary responsibility.
C) Legal accountability.
D) Fiscal accountability.

24. Which of the following is a required program revenue category in the government-wide
statement of activities?

A) Grants—capital.
B) Charges for services.
C) Grants—operating.
D) All of the above.

25. Which of the following would increase the balance in net assets—invested in capital assets,
net of related debt?

A) Acquisition of a building to be used by the police department.

B) Issuance of long-term debt to be used to acquire equipment for the police department.

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C) A gift of land to the city restricted by the donor to be used as a park.

D) None of the above.

26. Which of the following is evidence of fiscal independence for the purpose of considering
whether one entity is a component unit of another?

A) The potential component unit is precluded from issuing long-term debt.

B) The potential component unit raises taxes without the approval of the primary
government.
C) The budget of the potential component unit is approved by the primary government.
D) The board or council of the potential component unit includes any members of the
primary government's management team.

27. What adjustments are needed before data from the governmental fund financial statements
can be incorporated into the government-wide financial statements?

A) Conversion from the current financial resources measurement focus to the economic
resources measurement focus.
B) Conversion from the modified accrual basis of accounting to the accrual basis of
accounting.
C) Aggregation.
D) All of the above.

28. What constitutes the basic financial statements of a government?

A) Financial section of the comprehensive annual financial report (CAFR).

B) Government-wide financial statements plus notes.
C) Government-wide financial statements plus fund financial statements plus notes.
D) Government-wide financial statements plus fund financial statements plus notes plus
required supplementary information (RSI).

29. What is the minimum level of detail required for expenditures presented in the governmental
fund statement of revenues, expenditures, and changes in fund balance?

A) Program and object.

B) Function and character.
C) Program and department.
D) Character and object.

30. Which of the following is one of the basic sections of a comprehensive annual financial
report?

A) Financial section.
B) Single audit section.
C) Supplementary section.
D) Investment section.

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31. Government-wide financial statements present the government's financial position using

A) Total financial resources measurement focus/accrual basis of accounting.

B) Economic resources measurement focus/accrual basis of accounting.
C) Current financial resources measurement focus/modified accrual basis of accounting.
D) Current financial resources measurement focus/cash basis of accounting.

32. Required government-wide statements are a

A) Statement of net assets and statement of cash flows.

B) Statement of net assets, statement of activities, and statement of cash flows.
C) Statement of net assets and statement of activities.
D) Statement of activities and statement of cash flows.

33. Infrastructure assets and long-term liabilities will be reported in the

A) Letter of transmittal.
B) Fund financial statements.
C) Management's discussion and analysis.
D) Government-wide financial statements.

34. Nonmajor funds are reported

A) In the management's discussion and analysis preceding the financial statements.

B) In a single column in the fund financial statements.
C) In a note disclosure following the financial statements.
D) In the government-wide financial statements.

35. The comprehensive annual financial report (CAFR) of a government should contain a
statement of revenues, expenses, and changes in net assets for

A) Both proprietary and governmental funds.

B) Governmental but not proprietary funds.
C) Proprietary but not governmental funds.
D) Neither governmental nor proprietary funds.

36. Culver City's school district is a legally separate entity, but two of its seven board members
are also city council members and the district is financially dependent upon the city. The
school district should be reported as a

A) Blended unit.
B) Note disclosure.
C) Discrete presentation.
D) Primary government.

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37. Balsam City’s library board is appointed by the city council which has agreed to subsidize
the operating costs of the library at a material amount to be determined each year. In
addition, the city is paying debt service on general obligation bonds issued to construct the
library. Based on generally accepted accounting principles (GAAP) criteria for defining the
reporting entity:

A) The library is a component unit.

B) The city is the primary government.
C) Financial data for the library's General Fund should be blended with the financial data for
the city's special revenue funds.
D) Both A and B are correct.

38. Which of the following items typically differ between governmental fund statements and
governmental activities at the government-wide level?

A) Cash collected on property taxes receivable.

B) Capital outlays.
C) Accounts payable and other accrued expenses.
D) Inventories.

39. Which of the following is not one of the typical placement methods for communicating
information to external users of government financial reports?

A) Recognition in the financial statements.

B) Disclosure in the notes to the financial statements.
C) Presentation as required supplementary information
D) All of the above are used by governments.

40. A report to citizens prepared by some governments to provide highly condensed financial
information, budget summaries, and narrative descriptions is called a (an)

A) Comprehensive annual financial report.

B) Basic financial statement.
C) Popular report.
D) Supplementary report.

Short Answer
41. The following are key terms in Chapter 9 that relate to the reporting entity:

A. Blended presentation
B. Component units
C. Discrete presentation
D. Financial reporting entity
E. Jointly governed organizations
F. Joint venture
G. Other stand-alone governments

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H. Primary governments

For each of the following definitions, indicate the key term from the list above that best matches
by placing the appropriate letter in the blank space next to the definition.

_____ 1. A separate government or agency that is combined for purposes of reporting on the
whole entity
_____ 2. Reporting financial data of a component unit in a manner similar to that in which the
financial data of the primary government are presented
_____ 3. A state government, general purpose local government, or special purpose government
that is independent of other state or local governments
_____ 4. A legally separate governmental organization that does not have a separately elected
government body
_____ 5. Primary government and all related units

42. For the following items that require reconciliation between governmental funds financial
statements and governmental activities financial statements at the government-wide level
according to GASBS 34, indicate whether the reconciliation will A) always be subtracted from
fund balances—governmental funds, B) always be added to fund balances—governmental
funds, or C) may be added to or subtracted from fund balances—governmental funds in arriving
at net assets of governmental activities.

_____ 1. Capital assets used in governmental activities

_____ 2. Long-term liabilities that are not payable in the current period
_____ 3. Net assets of internal service funds that are primarily governmental in nature
_____ 4. Accrued interest payable not due in the current period

Essay
43. What is meant by the term “reporting entity” in accounting for state and local governments?

44. "Interim financial reports are needed for state and local governments even though external
users of financial reports have no need to assess monthly or quarterly performance of the
government." Do you agree? Why or why not?

45. Describe the objective of financial reporting by state and local governments.

46. In your own words, describe the nature of a component unit as it is related to a primary
government. Provide some examples and describe the financial reporting for a component
unit.

47. Describe what government-wide statements are intended to convey to readers and contrast
that with fund financial statements.

48. Describe the process for capturing the fund accounting information required for government-
wide financial statements.

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49. Describe some items requiring adjustments when modified accrual basis accounting
information must be converted to accrual basis accounting in preparation of government-
wide statements.

50. Explain why other comprehensive bases of accounting (OCBOA) may be used by a state or
local government instead of GASBS 34 standards which are generally accepted accounting
principles (GAAP).

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SOLUTIONS TO CHAPTER 9 TESTBANK

True/False

1. Level: Easy; Content: Concept

True. Most citizens and even accountants whose experience is primarily with business sector
entities have little understanding of the overlapping layers of general purpose and special
purpose governmental organizations that have some jurisdiction over them. The first note to the
audited financial statements will include a description of the reporting entity following the
criteria established in GASB Codification 2100.

2. Level: Medium; Content: Concept

False. Governments should prepare whatever statements are required by law, but some financial
information may be needed daily by administrators. Also, complete interim financial statements
are usually desired at regular intervals by administrators, legislators, news media, and others
concerned with current information about aspects of the financial management of the unit.
Governments concerned with reporting in conformity with GAAP need, as a minimum, to
prepare the basic financial statements, notes thereto, and management's discussion and analysis
as illustrated and discussed in Chapter 9.

3. Level: Easy; Content: Concept

False. The first two sections are required in GASB standards for a comprehensive annual
financial report; however, the third section is a statistical section, not a supplemental section.

4. Level: Medium; Content: Concept

False. The MD&A should provide information that is prospective in nature. Because the MD&A
is required supplementary information it should present information based on known facts at the
date of the annual report.

5. Level: Medium; Content: Concept

False. GASBS 44 requires that information should be presented in five categories: (1) financial
trends information, (2) revenue capacity information, (3) debt capacity information, (4)
demographic and economic information, and (5) operating information.

6. Level: Medium; Content: Concept

True. Other signals that a component unit is dependent upon a primary government include the
primary government is entitled to a component unit’s resources and the primary government
provides financial support to the component unit.

7. Level: Medium; Content: Concept

False. The accounting system must make it possible to present fairly the financial position and
results of financial operations of the government as a whole, as well as fund financial activity
and compliance with finance-related legal and contractual provisions in conformity with
generally accepted accounting principles promulgated by the Government Accounting Standards
Board (GASB), not FASB.

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8. Level: Medium; Content: Concept

False. The government-wide statements of net assets and statement of activities will have a
column to represent business-type activities, however, there is no requirement to present a
statement of cash flows in the government-wide statements.

9. Level: Hard; Content: Concept

False. Combined financial statements is a term used prior to GASBS 34. Two government-wide
financial reports that consolidate governmental and business-type activities are required in
GASBS 34's general purpose external financial reports.

10. Level: Medium; Content: Concept

True. Only governmental and business-type activities are reported on the two government-wide
financial statements: statement of net assets and statement of activities. Fiduciary activities
represent assets and liabilities that by definition do not belong to the government. Accordingly,
the GASB requires that information about fiduciary activities be excluded from the government-
wide financial statements.

11. Level: Medium; Content: Concept

False. OCBOA are not generally accepted and, if used by a state or local government, are
considered special reports and it should be made clear that the presentation is not intended to be
GAAP.

12. Level: Medium; Content: Concept

False. Capital assets acquired by governmental funds are financial uses of resources. As such,
in converting to accrual the amount of the capital assets acquired should be added back to total
fund balances—governmental funds to arrive at net assets of governmental activities.

13. Level: Medium; Content: Concept

False. It is conceptually better to have government-wide, accrual based accounting information
available on demand throughout the year, or at least monthly, to meet the needs of external
financial statement users.

14. Level: Medium; Content: Concept

True. This statement reflects GASB Concepts Statement No. 1.

15. Level: Medium; Content: Concept

True. There are nine reconciling items in converting governmental fund statements to
governmental activities statements at the level presented in Chapter 9.

Multiple Choice

# Answer Level Content

16. C Easy Concept
17. D Medium Concept
18. D Medium Concept

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19. D Medium Concept

20. C Medium Concept
21. B Medium Concept
22. C Medium Concept
23. D Medium Concept
24. D Medium Concept
25. A Medium Concept
26. B Medium Concept
27. D Medium Concept
28. C Medium Concept
29. B Medium Concept
30. A Easy Concept
31. B Medium Concept
32. C Easy Concept
33. D Medium Concept
34. B Medium Concept
35. C Medium Concept
36. C Medium Concept
37. D Medium Concept
38. B Medium Concept
39. D Medium Concept
40. C Medium Concept

Short Answer
41. Level: Medium; Content: Concept
1. B, 2. A, 3. H, 4. G, 5. D

42. Level: Hard; Content: Concept

1. B, 2. A, 3. C, 4. A

Essay
43. Level: Medium; Content: Concept

A reporting entity is defined as a primary government, organizations for which the primary
government is financially accountable, and other organizations for which the nature and
significance of their relationship with the primary government are such that exclusion would
cause the reporting entity's financial statements to be misleading or incomplete.

44. Level: Medium; Content: Concept

Agree. It is true that interim financial reports for governments are not widely provided to
external users. However, GASB standards indicate the provision of interim financial reports,
mainly for use of administrators of the government, as well as to assist members of the
legislative branch in monitoring current financial status and progress toward achieving the
annual budget. Other users having a particular interest in the financial management of the

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government (e.g., news media and citizens) may find interim reports of use.

45. Level: Medium; Content: Concept

The objective of government financial reporting at the state and local level is to assist
governments to discharge their duty to be publicly accountable in a democratic society for the
resources with which they are entrusted. Government managers should demonstrate fiscal
accountability, whether the government has raised and spent financial resources in accordance
with budget plans and in compliance with pertinent laws and regulations, as well as operational
accountability, whether the government has used its resources efficiently and effectively in
meeting operating objectives.

46. Level: Medium; Content: Concept

A component unit is an organization for which the nature and significance of its relationship with
another government is such that excluding it from that government's financial statements would
be misleading to the public. Component units can be museums, libraries, economic development
corporations, housing commissions, transit authorities that are dependent upon the primary
government for funding, authorization to issue debt, and other financial decisions. If a reporting
entity is entitled to the resources of a related government, then the term “component unit” is
applied to the government that must give up it’s assets if asked and the assets, liabilities, net
assets, and results of operations are discretely presented as a column in the reporting entity's
financial statements if the amounts are significant. Blending those elements into the reporting
unit’s financial statements may also be appropriate if certain conditions are met.

47. Level: Medium; Content: Concept

Government-wide statements are designed to demonstrate operational accountability; that is,

information useful in assessing operating results and short- and long-term financial position and
the cost of providing government services from an economic perspective reported in entity-wide
financial statements. Governmental fund financial statements are designed to demonstrate fiscal
accountability; that is, current-period financial position and budgetary compliance. Proprietary
fund financial statements focus on total economic resources and, like government-wide financial
statements, are designed to convey operational accountability.

48. Level: Medium; Content: Concept

There are two basic approaches to obtaining the information necessary to prepare the
government-wide statements: (1) the dual-track approach which requires the accounting
information system to be capable of capturing two bases of accounting (i.e., modified accrual
and accrual) for each transaction as it is recorded in the underlying journals and ledgers, and (2)
conversion of fund accounting information at the end of a period (e.g., month or year) to accrual
accounting, when appropriate.

49. Level: Medium; Content: Concept

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Items requiring adjustment when going from modified accrual basis of accounting to accrual
basis of accounting include: (1) capital expenditures are reported as capital assets, (2) annual
depreciation on capital assets is recognized, (3) other financing sources from bonds are reported
as long-term liabilities, (4) interest on long-term debt is recorded, (5) internal service activity is
moved from proprietary funds to be reported with governmental activities, (6) transfers between
funds are netted and reported as internal balances, and (7) interfund transfers between
governmental funds and internal service funds are eliminated.

50. Level: Medium; Content: Concept

Some small state and local governments may conclude that the costs of complying with GAAP
outweigh the benefits. Those governments may not be participants in the bond market, and
therefore would not have the same set of users for their external financial statements as would
governments with tax-exempt debt. OCBOA accounting records may be easier to prepare and
easier to understand for users.

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