1

CHAPTER 2

Questions 1 to 5

1. Describe the governmental activities of a state or local government and identify the

measurement focus and basis of accounting used in accounting and financial reporting for

these activities.

Certain core services are provided by most general purpose governments—those related

to the protection of life and property (e.g., police and fire protection), public works (e.g.,

streets and highways, bridges, and public buildings), parks and recreation facilities and

programs, and cultural and social services, among others. Governments must also incur

costs for general administrative support (such as, data processing, finance, and personnel)

of its service departments. Core governmental services, together with general

administrative support, comprise the major part of what GASB refers to as governmental

activities. The measurement focus and basis of accounting for these activities is on the

flow of current financial resources on the modified accrual basis in the governmental

funds and on the flow of economic resources on the accrual basis in the Governmental

Activities column of the government-wide financial statements. 

2. Describe the business-type activities of a state or local government and explain how and

why accounting and financial reporting for business-type activities differ from those for

governmental activities.

The business-type activities of a government include public utilities (such as electric,

water, gas, and sewer utilities), transportation systems, toll roads and bridges, hospitals,

parking garages and lots, liquor stores, golf courses, airports, and swimming pools,

among other activities. Many of these activities are intended to be self-supporting by

 2

charging users for the services they receive. Focusing financial reporting on economic

resources recognized on the accrual basis of accounting allows the government to

determine whether charges for services are sufficient to cover the full cost of the activity.

This measurement focus and basis of accounting is the same used for reporting

governmental activities in the government-wide financial statements, but quite different

from the current financial resources measurement focus and modified accrual basis of

accounting used in the governmental funds.

3. Describe the Fiduciary activities of a state or local government and explain how

accounting and financial reporting for fiduciary activities differ from those for

governmental and business-type activities.

Fiduciary activities of a government involve the government’s discharge of its fiduciary

responsibilities, either as an agent or trustee, for parties outside the government. For

example, a government may serve as agent for other governments in the administering

and collecting of taxes. Fiduciary activities are accounted for in agency funds, investment

trust funds, pension trust funds, and private-purpose trust funds. Fiduciary activities are

reported only in the fund financial statements and not in the government-wide financial

statements because these resources belong to external parties, not the government.

Fiduciary funds use accrual accounting and focus on economic resources, as do business-

type activities. However, reporting for fiduciary activities differs from that for

governmental funds since the latter funds focus primarily on the budget and current

financial resources.
 3

4. What are the three categories of funds prescribed by GASB standards and which fund

types are included in each? Do the three fund categories correspond precisely with the

three activity categories described in Chapter 2? If not, how do they differ?

The three categories of funds are governmental, proprietary, and fiduciary. The fund

types included in each category are shown below:

Governmental Proprietary Fiduciary

General Fund
Special revenue funds
Debt service funds
Capital projects funds
Permanent funds
Enterprise funds
Internal service funds
Agency funds
Investment trust funds
Pension (and other
employee benefit) trust
funds
Private-purpose trust
funds

These categories correspond to the three activity categories with the exception that

financial information for internal service funds is generally reported in the Governmental

Activities column of the government-wide financial statements. However, if an internal

service fund predominantly serves an enterprise fund, its financial information is reported

in the Business-type Activities column.

5. Explain what is meant by the sentence, "A fund is a fiscal and an accounting entity."

As a fiscal entity, a fund has its own resources and can incur liabilities to be repaid from

the fund resources. As an accounting entity, the fund has its own self-balancing set of

accounts.
 4

Multiple Choice Questions

1. Which of the following is a correct statement about how financial information for the

activities of governments should be reported?

a) Information about business-type activities should be reported in both the government-

wide and proprietary fund financial statements using the same basis of accounting for

both

b) Information about governmental activities should be reported in both the government-

wide and governmental fund financial statements using the same basis of cost

accounting for both

c) Information about fiduciary activities should be reported in both the government-wide

and fiduciary fund financial statements, using the same basis of accounting for both.

d) All of the above

2. Which of the following statements is true regarding the basic financial statements of a

state or local government?

a) Separate columns should be provided in the government-wide financial statements for

governmental activities and business-type activities.

b) Governmental fund and proprietary fund financial statements should provide a

separate column for each major fund.

c) Aggregate information about all non-major governmental funds or non-major

enterprise funds should be reported in a single column of the governmental fund or

proprietary fund financial statements.

d) All of the above.

 5

3. In the reporting of governmental activities, fiscal accountability is demonstrated by:

a) Government-wide financial statements.

b) Governmental fund financial statements.

c) Both fund and government-wide financial statements.

d) Neither fund nor government-wide financial statements

4. The measurement focus and basis of accounting that should be used for the

governmental fund financial statements are:

Measurement Focus Basis of Accounting

a) Current Financial resources Modified accrual

b) Current Financial resources Accrual

c) Economic resources Modified accrual

d) Economic resources Accrual

5. Which of the following statements is true regarding the definition of a fund?

a) A fund is a fiscal and accounting entity.

b) A fund has a self-balancing set of accounts recording cash and other financial

resources, together with all related liabilities and residual equities or balances and

changes therein.

c) Resources, related liabilities, and residual equities or balances and changes therein are

segregated for the purpose of carrying out specific activities or attaining certain

objectives.

d) All of the above

 6

6. Capital assets used for governmental activities, such as those of the police department,

should be reported in:

a) Governmental fund financial statements only.

b) Government-wide financial statements only.

c) Neither governmental fund nor government-wide financial statements.

d) Both governmental fund and government-wide financial statements.

7. Assets and liabilities of activities for which the government is acting in either an agency

or trustee capacity for individuals, organizations, or other governments should be

reported in:

a) The fiduciary column of the government-wide financial statements.

b) The fiduciary fund financial statements.

c) Both government-wide and fiduciary fund statements.

d) Neither government-wide nor fiduciary fund statements

8. Under modified accrual basis of accounting:

a) Revenues are recognized at the time an exchange transaction occurs.

b) Expenditures are recognized as the cost of an asset expires or is used up in providing

governmental services.

c) Revenues are recognized when current financial resources become measurable and

available to pay current-period obligations.

d) Expenses are recognized when an obligation occurs for costs incurred in providing

services.
 7

9. Financial information about an internal service fund should be reported in the proprietary

fund financial statements and the:

a) Governmental Activities column of the government-wide financial statements.

b) Business-type Activities column of the government-wide financial statements.

c) Either A or B, depending on whether the internal service fund predominantly serves

governmental activities or business-type activities.

d) None of the above

10. A certain city reports the following year-end total assets:

General Fund                                           $18,400,000

Library Fund (a special revenue fund)        2,900,000

Debt Service Fund                                       2,600,000

Total governmental funds                           26,300,000     

Total governmental and enterprise funds combined 51,250,000

Based on this information, which funds should be reported as major funds?  

a) General Fund only.

b) General Fund and Library Fund.

c) General Fund and Debt Service Fund.

d) All three funds should be reported as major funds.