Test Bank For Accounting for
Governmental and Nonprofit
1. Which of the following is a distinguishing feature of governmental and nonprofit
accounting?
a) The focus on generating profits.
b) The use of accrual-based accounting for all funds.
c) The inclusion of fund accounting.
d) The exclusion of budgetary accounting.
Answer: c) The inclusion of fund accounting.
Rationale: Governmental and nonprofit entities use fund accounting to ensure
resources are allocated according to legal and policy restrictions.
,2. What is the main purpose of a General Fund in governmental accounting?
a) To account for all business-type activities.
b) To handle revenues not restricted to specific purposes.
c) To manage fiduciary activities.
d) To report all governmental capital assets.
Answer: b) To handle revenues not restricted to specific purposes.
Rationale: The General Fund accounts for all financial resources not required to be
accounted for in another fund.
3. Which of the following is true about the Modified Accrual Basis of accounting used
by governmental funds?
a) Revenues are recognized when measurable and available.
b) Expenses are recognized when incurred.
c) Long-term liabilities are recorded in full when incurred.
d) Depreciation is recorded for capital assets.
Answer: a) Revenues are recognized when measurable and available.
Rationale: Under the modified accrual basis, revenues are recognized when they are
measurable and available to finance expenditures of the current period.
4. What type of fund would be used by a government to account for resources
legally restricted for the acquisition of fixed assets?
a) Debt Service Fund.
b) Enterprise Fund.
c) Capital Projects Fund.
d) Special Revenue Fund.
Answer: c) Capital Projects Fund.
Rationale: A Capital Projects Fund is used to account for financial resources used for
the acquisition or construction of major capital facilities.
,5. In nonprofit accounting, what financial statement shows the change in net assets
over a period?
a) Statement of Financial Position.
b) Statement of Activities.
c) Statement of Cash Flows.
d) Statement of Functional Expenses.
Answer: b) Statement of Activities.
Rationale: The Statement of Activities reports changes in net assets by showing
revenues, expenses, gains, and losses.
6. Which fund type would most likely be used to account for a city’s water utility
operations?
a) Special Revenue Fund.
b) Internal Service Fund.
c) Enterprise Fund.
d) General Fund.
Answer: c) Enterprise Fund.
Rationale: An Enterprise Fund is used for operations financed and operated in a
manner similar to private businesses, such as a city water utility.
7. What is the primary objective of the budgetary control system in governmental
accounting?
a) To measure profitability.
b) To ensure compliance with legal and regulatory requirements.
c) To provide information for investors.
d) To calculate the tax levy for the period.
Answer: b) To ensure compliance with legal and regulatory requirements.
, Rationale: The budgetary control system helps ensure that government operations
comply with laws and regulations regarding the use of financial resources.
8. What financial statement is unique to government-wide financial statements
under GASB standards?
a) Statement of Net Position.
b) Statement of Cash Flows.
c) Statement of Changes in Net Assets.
d) Balance Sheet.
Answer: a) Statement of Net Position.
Rationale: The Statement of Net Position presents information about the
government’s financial position at a specific point in time, under GASB standards.9.
What is the primary purpose of the Statement of Functional Expenses for nonprofit
organizations?
a) To report changes in net assets.
b) To categorize expenses by function and natural classification.
c) To show cash inflows and outflows for the period.
d) To allocate revenues among various funds.
Answer: b) To categorize expenses by function and natural classification.
Rationale: The Statement of Functional Expenses helps users understand how
resources are used for program and supporting services by categorizing expenses
functionally and naturally.
10. Under GASB standards, which of the following best describes a Fiduciary Fund?
a) A fund used to account for resources restricted to specific programs.
b) A fund that accounts for resources held by the government in a trustee or agency
capacity for others.
c) A fund used to account for business-type activities.
d) A fund that accounts for resources available for any general government purpose.
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