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

The Federal Accounting Standards Advisory Board (FASAB) was established in 1990 by the U.S. Department of the Treasury, the Office of Management and Budget (OMB), and the Government Accountability Office (GAO). These three entities are collectively known as the “sponsors” of FASAB. Each has a representative who serves as a voting member of the board.

FASAB is responsible for establishing GAAP for federal entities. The sponsor organizations appoint board members and have authority over standard-setting governance, but do not individually veto standards. Final standards are issued only after due process, including public comment and sponsor approval.

Relevant Standards and References:

FASAB Memorandum of Understanding (MOU) Among Treasury, OMB, and GAO (as amended): “These three agencies are the sponsors of FASAB and each appoints one voting member to the Board.”

FASAB Governance Manual (2023 Edition), Section 2: Identifies Treasury, OMB, and GAO as sponsors and voting members.

AGA’s “CGFM Study Guide 2,” Chapter 2: Highlights the role of sponsors in the standard-setting process.

Therefore, Option D is correct.

Comprehensive Detailed Explanation:

In governmental funds (using the modified accrual basis), expenditures are recorded when financial resources are used — typically when cash is disbursed. However, in government-wide statements (accrual basis), only the portion of the asset’s cost consumed in the period is recorded as an expense (i.e., depreciation).

Paying for capital assets such as vehicles is an expenditure in the governmental funds, but not an expense in the accrual-based government-wide financials. Instead, the cost is capitalized and depreciated over time.

Relevant References:

GASB Statement No. 34 – Government-wide vs. Fund Financial Reporting

GASB Codification Section 1300 – Modified Accrual Accounting

GFOA Best Practices – Capital Asset Reporting

Answer: C. At the end of the fiscal year, the government pays for ten vehicles which will be depreciated over five years.

Despite differences in sector goals, all entities—public, private, nonprofit, or government—use financial reporting to provide information that assists stakeholders in making informed decisions.

While private-sector entities focus on profitability and governmental entities focus on accountability and stewardship, both require decision-useful financial data.

Relevant References:

FASAB SFFAC No. 1 – Objectives of Federal Financial Reporting

GASB Concepts Statement No. 1 – Objectives of Financial Reporting

FASB Statement of Financial Accounting Concepts No. 1

Answer: A. provide users with decision support

In federal accounting, upon receipt of utility bills (and before payment), a government agency records an obligation. Since the service has already been received and payment is imminent, the budgetary accounting entry reduces available allotments and records the obligation.

The entry would look like:

Debit: Allotment Available for Commitment/Obligation

Credit: Undelivered Orders – Unpaid (or potentially Delivered Orders – Unpaid, depending on agency policy)

In the case of immediate payment, the next step would move from obligation to expenditure, but the initial obligation entry affects the budgetary accounts as described above.

Relevant References:

FASAB SFFAS No. 7 – Budgetary Accounting

Treasury Financial Manual (TFM) – Budgetary Transactions

OMB Circular A-11

Answer: A. Debit Allotment Available for Commitment/Obligation / Credit Undelivered Orders Unpaid

GASB Statement No. 62 (based on FASB ASC 450-20) provides guidance on recognizing loss contingencies. If a loss is probable and the amount can only be estimated as a range, and no single amount within the range is better, the minimum amount in the range should be accrued.

The remainder of the range should be disclosed in the notes to the financial statements.

Thus:

Accrue: $100 million

Disclose: Additional exposure up to $200 million

Relevant References:

GASB Statement No. 62 – Paragraph 96

GAAP Implementation Guide – Loss Contingencies

AICPA Audit Guide – Government Auditing Standards

Answer: A. $100 million and disclose in the notes the exposure to an additional $200 million loss

Comprehensive Detailed Explanation:

Trust funds in the federal government are used to account for assets held in a fiduciary capacity for specific purposes. These funds typically involve revenue dedicated by law for particular programs and purposes, such as:

Social Security Trust Fund

Medicare Trust Fund

Unemployment Trust Fund

These involve collections from earmarked taxes or contributions and are used to provide specific benefits or services.

Relevant References:

FASAB SFFAS No. 27 – Identifying and Reporting Earmarked Funds

Treasury Financial Manual – Trust Fund Accounts

OMB Circular A-11, Section 20 – Federal Fund and Trust Fund Definitions

Answer: B. provisions of benefits, goods or services financed by specific revenue sources

The Governmental Accounting Standards Board (GASB) and the Federal Accounting Standards Advisory Board (FASAB) are both responsible for promulgating (i.e., formally establishing and issuing) accounting standards:

GASB: for state and local governments

FASAB: for federal entities

They do not establish auditing standards (that is the role of GAO and AICPA), nor do they issue joint standards or follow FASB unless no applicable guidance exists.

Relevant References:

GASB Statement No. 1 – Authoritative Status of GASB Pronouncements

FASAB Mission and Responsibilities

GAO Yellow Book (Government Auditing Standards)

Answer: C. promulgate accounting standards

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:

Capitalization of interest begins when three conditions are met:

Expenditures for the asset have been made (i.e., costs are being incurred)

Activities necessary to prepare the asset for use are in progress

Interest cost is being incurred

Signing a contract does not trigger capitalization — the actual incurrence of costs and activities must begin.

This rule is based on GAAP and FASB/GASB guidance for capital asset construction.

Relevant References:

GASB Statement No. 62 – Capitalization of Interest

FASB ASC 835-20 – Interest Capitalization

GFOA – Capital Asset Accounting Guidelines

Answer: A. the contract is signed for purchasing the asset

The Prompt Payment Act (31 U.S.C. Chapter 39) mandates that federal agencies pay vendors on time. Specifically, if a contract specifies a due date for payment, agencies are required to pay by that date. If no specific due date is mentioned, payment must be made within 30 days after the later of either:

Receipt of a proper invoice, or

Acceptance of goods/services.

If agencies fail to pay by the due date, they must automatically calculate and pay interest penalties to the vendor.

Relevant Standards and References:

31 U.S.C. § 3903 (Prompt Payment Act): “A payment is timely if it is made by the due date prescribed by the contract or within 30 days after receipt of a proper invoice or acceptance of goods or services.”

OMB Circular A-125, “Prompt Payment,” Section 7(a)

Treasury Financial Manual (TFM), Volume I, Part 6, Chapter 8040

Therefore, Option D is correct.

Comprehensive Detailed Explanation:

According to FASAB's Objectives of Federal Financial Reporting (Statements of Federal Financial Accounting Concepts, particularly SFFAC No. 1), the four major objectives of federal financial reporting are:

Budgetary Integrity

Operating Performance

Stewardship

Systems and Control

Mission readiness is not one of the core federal financial reporting objectives under FASAB standards, although it may be a goal of some federal agencies operationally (e.g., DOD), it is not one of the defined financial reporting objectives.

Answer: C. mission readiness

Relevant References:

FASAB SFFAC No. 1 – Objectives of Federal Financial Reporting

FASAB Handbook of Accounting Standards and Other Pronouncements

The formal financial statements of a state or local government include:

Basic Financial Statements (government-wide and fund statements)

Notes to the Financial Statements

Required Supplementary Information (RSI), including MD&A and pension data

The auditor’s letter (i.e., Independent Auditor’s Report) is included in the financial section of the ACFR but is not technically part of the financial statements themselves. It is a separate document providing the auditor's opinion.

Relevant References:

GASB Statement No. 34

GFOA ACFR Reporting Guide

AICPA Governmental Audit Guide

Answer: D. auditor’s letter

In the statewide financial statements, which represent the government-wide financial reporting model, depreciation is reported using the full accrual basis of accounting. This means long-term assets and liabilities are recognized, and depreciation is recorded systematically over the useful lives of capital assets.

The modified accrual basis (used in governmental funds) does not report depreciation because capital assets are not reported in those funds.

Relevant References:

GASB Statement No. 34 – Depreciation Reporting

GASB Concept Statement No. 1 – Measurement Focus and Basis of Accounting

GFOA – Capital Asset and Depreciation Policies

Answer: D. accrual basis

To annualize the projected sales tax revenue from 9 months of actual data:

Step 1: Determine the monthly average:

$26.5 million ÷ 9 months = $2.944 million/month

Step 2: Project for 12 months:

$2.944 million × 12 = $35.33 million ≈ $35.3 million

However, the closest and most likely answer choice based on rounding is:

Answer: B. $35.3 million

Correction to earlier assumption: The original intended answer was marked as C. $40.0 million, but that would only apply if growth or seasonal adjustments were involved, which the question states are unknown. Therefore, the correct projected revenue based on straight-line extrapolation is:

Final Answer: B. $35.3 million

General obligation (GO) bonds are backed by the full faith and credit of the issuing government, meaning they are secured by the government's taxing power. Because of this strong security, GO bonds typically carry lower interest rates compared to other financing options like revenue bonds or commercial paper.

Revenue bonds, by contrast, are supported only by the revenues from a specific project or source (e.g., tolls or utility fees), which generally results in higher perceived risk and thus higher interest rates. Certificates of deposit are not debt instruments used for financing projects but rather for investment.

Relevant Standards and References:

GFOA Best Practices – Debt Management

Government Finance Officers Association (GFOA) Debt 101

MSRB (Municipal Securities Rulemaking Board): GO vs. Revenue Bonds

GASB Concepts Statement No. 1, Objective of Financial Reporting

Therefore, Option B is correct.

The governmental funds (e.g., general fund, special revenue fund, capital projects fund) are reported using the modified accrual basis and current financial resources measurement focus. Required financial statements for governmental funds include:

Balance Sheet

Statement of Revenues, Expenditures, and Changes in Fund Balances

There is no requirement for a statement of cash flows for governmental funds. The statement of cash flows is only required for proprietary funds (e.g., enterprise and internal service funds) and is prepared using the direct method.

Relevant References:

GASB Statement No. 34 – Basic Financial Statements

GASB Codification Section 2200

GFOA Governmental Fund Reporting Guidelines

Answer: D. statement of cash flows

According to GASB Statement No. 96 (Subscription-Based Information Technology Arrangements or SBITAs), a subscription agreement is considered “short-term” if the maximum possible term (including renewal options) is 12 months or less.

Short-term SBITAs are not reported as subscription liabilities and are accounted for as outflows (expenses or expenditures) when incurred.

Relevant References:

GASB Statement No. 96 – SBITAs (Issued May 2020)

GASB Implementation Guide No. 2021-1 – Q&A on SBITAs

GFOA Advisory – Cloud Computing and Subscription Agreements

Answer: B. 12 months

Interest accrued on the public debt (e.g., Treasury securities) is considered a government expenditure. In federal financial reporting and budgeting, this is classified as an outlay, representing a payment made to meet an obligation.

It is not a receipt (revenues collected), a cost of goods sold (used in commercial accounting), or a tax expenditure (which refers to revenue foregone due to deductions, credits, etc.).

Relevant References:

OMB Circular A-11 – Budgetary Definitions

Treasury Financial Manual (TFM) – Federal Outlay Reporting

GAO Glossary – Public Debt Interest Treatment

Answer: B. an outlay

The government-wide financial statements required by GASB Statement No. 34 include:

Statement of Net Position (similar to a balance sheet)

Statement of Activities (similar to an income statement)

These financial statements provide a consolidated view of the government's financial position and activities using the economic resources measurement focus and accrual basis of accounting.

There is no requirement under GASB for a government-wide statement of cash flows.

Relevant Standards and References:

GASB Statement No. 34, Basic Financial Statements—and Management’s Discussion and Analysis—for State and Local Governments

GASB Codification Section 2200: Financial Reporting

GFOA Budgeting Best Practices

Therefore, Option C is correct.

The agency uses accrual accounting, meaning bad debt expense should be recognized based on the revenue earned, not the cash collected. The historical bad debt rate is 5%.

Fee revenue recorded = $1.1 million

Bad debt expense = 5% × $1,100,000 = $55,000

This matches the standard accounting treatment under FASAB SFFAS No. 1, where the expense is estimated and recognized in the same period as the related revenue.

Relevant References:

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

GAAP treatment for allowance for doubtful accounts

Treasury Financial Manual – Accounts Receivable Accounting

Answer: C. $55,000

First, we calculate total eligible project costs:

Eligible categories (architectural, construction, project management):

Architectural (actual): $90,000

Construction (actual): $10,000,000

Project management (city employee at 50% time for 6 months):

 $10,000/month × 6 months × 50% = $30,000

Total eligible cost = $90,000 + $10,000,000 + $30,000 = $10,120,000

State reimburses 40% of eligible cost:

0.40 × $10,120,000 = $4,048,000

Relevant References:

OMB Uniform Guidance (2 CFR § 200) – Cost Principles

GFOA Best Practices – Grant Compliance

State grant agreements outlining cost-sharing requirements

Answer: A. $4,048,000

Comprehensive Detailed Explanation:

Under 2 CFR § 200.446 of the OMB Uniform Guidance, idle facilities (or idle capacity) costs are generally unallowable. However, exceptions exist. One allowable condition is when the idleness results from fluctuations in workload that are considered normal for the type of operation.

Other allowable cases include those due to reorganization, restraint, or repair/maintenance needs — but only within reasonable limits and duration.

Relevant References:

2 CFR § 200.446 – Idle Facilities and Idle Capacity

OMB Uniform Guidance (2 CFR Part 200) – Cost Principles

GAO Red Book – Allowable Grant Expenditures

Answer: A. fluctuation in workload is reasonably expected

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A basic financial statement that includes a budgetary comparison (typically the Statement of Revenues, Expenditures, and Changes in Fund Balances – Budget and Actual) is used to demonstrate whether the government complied with its legally adopted budget.

This is a core element of accountability in governmental financial reporting and is required under GASB Statement No. 34.

Relevant References:

GASB Statement No. 34 – Budgetary Comparison Statements

GASB Codification Section 2400 – Budgetary Accounting and Reporting

GFOA Best Practices – Budget Monitoring and Reporting

Answer: B. demonstrate compliance with the legally adopted budget

According to GASB Statement No. 69 (Government Combinations and Disposals of Government Operations), a transfer of operations occurs when one government relinquishes or ceases operations and another government assumes those operations, but no significant consideration (money, assets, or liabilities) is exchanged.

In this case, the fire district is assuming responsibility for fire protection without receiving funds or assets from the county. That aligns with the definition of a transfer of operations — not a merger or acquisition.

Relevant References:

GASB Statement No. 69 – Government Combinations and Disposals of Government Operations

GASB Codification Section G60 – Combinations and Transfers

GFOA Guidance on Intergovernmental Restructuring

Answer: C. a transfer of operations

In the governmental fund (such as the debt service fund), modified accrual accounting is used. Under this basis:

Payment of principal and interest is recorded as expenditures, not reductions of liabilities or interest expense.

No long-term liabilities (e.g., bonds payable) are recorded in governmental funds.

So, the correct journal entry is:

 Debit: Expenditures – Principal

 Debit: Expenditures – Interest

 Credit: Cash

Relevant References:

GASB Codification Section 1300 – Fund Accounting and Modified Accrual Basis

GASB Statement No. 34 – Fund-Level Reporting

GFOA Accounting and Reporting for Debt Service Funds

Answer: A. expenditures – principal and expenditures – interest

When a private bank issues a student loan that is insured by the government in case of default, the federal government is acting as a guarantor—not issuing the loan directly, but promising repayment to the lender if the borrower defaults. This is a classic example of a federal loan guarantee program.

Loan guarantees are off-budget unless called, and the government only incurs a liability if the student defaults.

Relevant References:

FASAB SFFAS No. 2 – Accounting for Direct Loans and Loan Guarantees

Credit Reform Act of 1990

OMB Circular A-11, Section 185 – Federal Credit Programs

Answer: B. a loan guarantee

When a government issues general obligation bonds at a premium, the premium is amortized over the life of the bond. Under the full accrual basis used in the government-wide financial statements (e.g., Statement of Activities), this amortization reduces the reported interest expense over time.

The fund financial statements (e.g., Statement of Revenues, Expenditures, and Changes in Fund Balance) follow the modified accrual basis and generally do not account for amortization of bond premiums.

Relevant References:

GASB Statement No. 34 – Government-Wide Financial Reporting

GASB Statement No. 65 – Items Previously Reported as Assets and Liabilities

GFOA – Debt Reporting Best Practices

Answer: B. Statement of Activities as a component of interest expense

FASAB SFFAS No. 10 (Accounting for Internal Use Software) provides guidance for capitalizing software development costs. The following costs are capitalized:

Software configuration and development: $750,000

Testing for functionality (ready for use): $225,000

These fall within the "software development stage."

The following are not capitalized:

Research costs (e.g., feasibility studies): $100,000 → Expense

Data conversion costs: $500,000 → Expense (unless part of application development, which it’s not here)

Capitalized total = $750,000 + $225,000 = $975,000

Relevant References:

FASAB SFFAS No. 10 – Accounting for Internal Use Software

OMB Circular A-136 – Capitalization Guidance

Treasury Financial Manual (TFM) – Capital Assets

Answer: B. $975,000

Temporary accounts (revenues, expenditures, and transfers) are closed at the end of the fiscal year to prepare the books for the next fiscal period. Tax revenues are a temporary account and are closed at year-end by transferring balances to fund balance accounts.

In contrast:

Taxes receivable (A) is a balance sheet (permanent) account.

Supplies inventory (C) is an asset.

Unassigned fund balance (D) is an equity account.

Relevant References:

GASB Codification Section 2200 – Fund Accounting and Closing Procedures

GFOA Accounting and Financial Reporting Manual

GAAP Fundamentals

Answer: B. tax revenues

Comprehensive Detailed Explanation:

The Performance and Accountability Report (PAR) is a consolidated report that federal agencies are required to submit. It typically includes:

Agency Head’s Message

Performance Section (performance goals/results)

Financial Section (financial statements, audit report, notes)

Other Accompanying Information (e.g., improper payments, internal control reports)

There is no “demographic section” required or defined in the structure of a PAR.

Relevant References:

OMB Circular A-136 – Financial Reporting Requirements

GPRA Modernization Act of 2010

CFO Act of 1990

Answer: D. demographic section

The primary purpose of accumulating and reporting cost information—especially in government and nonprofit environments—is to support internal decision-making. Cost data help managers assess program efficiency, evaluate resource use, and make policy or operational decisions.

While external financial statements may incorporate summarized cost information, and stockholders and regulatory agencies may have interests in private-sector settings, the most direct and core purpose is to support management.

Relevant References:

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

GFOA – Cost Accounting for Decision-Making

OMB Circular A-136 and A-11 (federal reporting objectives)

Answer: B. provide a means for management to assess decision performance