CPWM Budget and Finance 2 — Questions and Answers
Question 1: Which budgeting approach requires managers to justify every expenditure from scratch rather than basing allocations on prior-year spending?
- Incremental budgeting
- Zero-based budgeting (Correct answer)
- Capital budgeting
- Performance budgeting
Correct answer: Zero-based budgeting
Zero-based budgeting requires each budget cycle to start from zero and justify all expenditures anew, rather than using the prior year's budget as a baseline.
Question 2: A public works department receives a $500,000 grant that must be spent on road resurfacing within 18 months. This is best classified as what type of fund?
- General fund
- Enterprise fund
- Special revenue fund (Correct answer)
- Debt service fund
Correct answer: Special revenue fund
Special revenue funds account for revenues legally restricted or committed to expenditures for specified purposes, such as grant-funded projects.
Question 3: What is the primary purpose of a fund balance reserve policy in public works finance?
- To increase annual operating expenditures
- To ensure adequate liquidity for emergencies and budget shortfalls (Correct answer)
- To allow unrestricted capital purchases
- To reduce the department's tax levy requirement
Correct answer: To ensure adequate liquidity for emergencies and budget shortfalls
Fund balance reserve policies establish minimum reserve levels to maintain liquidity, cover unexpected costs, and protect against revenue shortfalls.
Question 4: Which type of cost does NOT change with the volume of services provided by a public works department?
- Variable cost
- Direct cost
- Fixed cost (Correct answer)
- Marginal cost
Correct answer: Fixed cost
Fixed costs remain constant regardless of service volume, such as facility lease payments or full-time employee salaries.
Question 5: A city issues $2 million in general obligation bonds to finance a new public works facility. What pledges repayment of these bonds?
- Revenue from the facility's operations
- The full faith and credit of the government (Correct answer)
- A dedicated sales tax
- Federal grant reimbursements
Correct answer: The full faith and credit of the government
General obligation bonds are backed by the full faith and credit of the issuing government, meaning the government's taxing power guarantees repayment.
Question 6: In governmental accounting, what does the modified accrual basis of accounting recognize revenues when they are?
- Earned and measurable
- Available and measurable (Correct answer)
- Collected in cash
- Invoiced to customers
Correct answer: Available and measurable
Modified accrual accounting recognizes revenues when they are both measurable and available (collectible within the current period or soon enough to pay current liabilities).
Question 7: Which financial document provides a detailed estimate of revenues and expenditures for a future fiscal year and requires legislative approval?
- Comprehensive Annual Financial Report (CAFR)
- Capital Improvement Plan (CIP)
- Annual operating budget (Correct answer)
- Management Discussion and Analysis (MD&A)
Correct answer: Annual operating budget
The annual operating budget is a legally adopted financial plan that estimates revenues and authorizes expenditures for the upcoming fiscal year.
CPWM Budget and Finance 2
Which budgeting approach requires managers to justify every expenditure from scratch rather than basing allocations on prior-year spending?