CPWM Financial Planning & Budgeting 4 — Questions and Answers
Question 1: In a modified accrual accounting system used by governmental funds, revenues are recognized when they are:
- Earned, regardless of when cash is received
- Available and measurable (Correct answer)
- Deposited into the government's bank account
- Approved by the governing body's budget ordinance
Correct answer: Available and measurable
Modified accrual recognizes revenues when they are both measurable (can be estimated) and available (collectible within the current period or shortly after).
Question 2: Which revenue source is most subject to economic downturns because it is tied directly to consumer spending?
- Property tax
- Special assessments
- Sales tax (Correct answer)
- Service charges
Correct answer: Sales tax
Sales tax collections decline sharply during recessions as consumers reduce spending, making it a volatile revenue source compared to property taxes.
Question 3: A public works department establishes an internal service fund to manage its vehicle fleet. The primary benefit of this approach is:
- It eliminates the need for annual budget appropriations for vehicles
- It centralizes costs and allows cost recovery from user departments via charges (Correct answer)
- It removes fleet assets from the government's balance sheet
- It qualifies the department for federal fleet management grants
Correct answer: It centralizes costs and allows cost recovery from user departments via charges
Internal service funds pool shared resources and allocate costs to user departments through charges, promoting accountability and efficient resource use.
Question 4: The Government Finance Officers Association (GFOA) recommends that local governments maintain an unassigned general fund balance of at least:
- 5% of annual revenues or expenditures
- Two months (approximately 17%) of annual operating expenditures (Correct answer)
- One full year of operating expenditures as a rainy-day reserve
- A fixed dollar amount set by state statute
Correct answer: Two months (approximately 17%) of annual operating expenditures
GFOA's best practice guideline recommends a minimum unrestricted general fund balance of two months (approximately 16.7%) of operating revenues or expenditures.
Question 5: Which method of capital asset valuation charges the same depreciation amount each year over the asset's useful life?
- Double declining balance
- Sum-of-the-years'-digits
- Straight-line depreciation (Correct answer)
- Units of production
Correct answer: Straight-line depreciation
Straight-line depreciation divides the depreciable cost equally across all years of useful life, producing a consistent annual charge.
Question 6: A public works director proposes funding road maintenance through a dedicated special assessment on properties that directly benefit. Compared to general fund appropriations, this approach:
- Provides less stable funding because assessments can be repealed easily
- Links the cost directly to benefiting property owners and may increase accountability (Correct answer)
- Requires annual voter approval to levy the assessment
- Is prohibited by GASB standards for infrastructure maintenance
Correct answer: Links the cost directly to benefiting property owners and may increase accountability
Special assessments earmark funding from those who benefit, creating a transparent user-pays relationship and a dedicated, stable revenue stream for the improvement.
Question 7: During budget preparation, a public works manager submits a decision package that includes a benefit-cost analysis. The primary purpose of this document is to:
- Satisfy federal environmental review requirements
- Justify a requested program or expenditure by quantifying its value relative to cost (Correct answer)
- Transfer budget authority between fiscal years
- Document historical spending for audit purposes
Correct answer: Justify a requested program or expenditure by quantifying its value relative to cost
A benefit-cost analysis supports budget decision-making by comparing the monetary value of a program's benefits to its costs, helping decision-makers prioritize resource allocation.
CPWM Financial Planning & Budgeting 4
In a modified accrual accounting system used by governmental funds, revenues are recognized when they are: