GAFRB AGA Examination 2: Governmental Accounting, Financial Reporting and Budgeting (GAFRB) Free Practice Exam Questions (2025 Updated)

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

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

Governmental fund financial statements (such as the General Fund, Special Revenue Funds, Capital Projects Funds) use the current financial resources measurement focus and the modified accrual basis of accounting. This focus reports inflows and outflows of current financial resources and excludes long-term assets and liabilities.

This differs from the government-wide financial statements, which use the economic resources measurement focus and full accrual basis.

Relevant References:

GASB Statement No. 34 – Basic Financial Statements

GASB Codification Section 1600 – Fund Accounting

GFOA Fund Accounting Guidance

Answer: C. current financial resources

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

Comprehensive Detailed Explanation:

According to FASAB Statement of Federal Financial Accounting Standards (SFFAS) No. 1, an accounts receivable should be recognized when a legal claim to cash exists — that is, when the federal agency has provided goods or services or an enforceable claim to payment has arisen.

This typically occurs after performance has occurred, not merely when an agreement or order is received.

Relevant References:

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

Treasury Financial Manual (TFM) – Receivables Accounting

OMB Circular A-136 – Financial Reporting Requirements

Answer: A. claims to cash against other entities are established

In an Annual Comprehensive Financial Report (ACFR), the Independent Auditor’s Report is part of the Financial Section. It is placed immediately before the basic financial statements and after the Management’s Discussion and Analysis (MD&A), not before it.

The proper sequence within the Financial Section of the ACFR is:

Independent Auditor’s Report

Management’s Discussion and Analysis (MD&A)

Basic Financial Statements

Required Supplementary Information (RSI)

Other Supplementary Information (as applicable)

Relevant References:

GASB Statement No. 34 – Basic Financial Statements and MD&A

GFOA’s Governmental Accounting, Auditing, and Financial Reporting (GAAFR)

GFOA Checklist for ACFR Preparation

Answer: B. financial section before the basic financial statements

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.

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

When an agency is developing a fee to recover costs for providing a service, it must calculate the full cost of the service. According to cost accounting standards for federal government operations, “full cost” includes:

Direct costs: staffing, supplies, materials directly used in service provision

Indirect costs: facility costs (e.g., location rent), equipment depreciation, administrative support, etc.

OMB Circular A-25, “User Charges,” requires that user fees for government services be based on the full cost of providing that service unless otherwise mandated by law. Therefore, staffing (a direct cost), location rent (indirect cost), and equipment depreciation (a capital asset cost) are all appropriate to include.

Relevant Standards and References:

OMB Circular A-25, “User Charges,” Section 6(d): “Full cost includes all direct and indirect costs to any part of the Federal Government of providing a good, resource, or service.”

FASAB SFFAS No. 4, Managerial Cost Accounting Concepts and Standards: Defines full cost components, including depreciation.

GAO “Principles of Federal Appropriations Law,” Red Book, Vol. I: Cost recovery practices in federal user fee settings.

Therefore, Option B is correct.

When a federal agency participates in a pension plan administered by another government entity (such as the Office of Personnel Management, OPM), and OPM bills the agency for a portion of the cost while covering the remainder itself, the portion not billed is considered an "imputed cost" to the agency. This imputed cost represents the agency's share of employee pension benefits that are financed on its behalf by another entity.

Accounting guidance requires that the employing agency recognize both the amount billed and the amount covered by OPM as a pension expense, recordingthe imputed cost as an expense and as an imputed financing source in its own financial statements.This treatment ensures full recognition of the economic cost of employing personnel, even if part of that cost is not directly paid by the agency.

Key references and standards:

Federal Accounting Standards Advisory Board (FASAB) SFFAS No. 5, “Accounting for Liabilities of the Federal Government”:

“Employing entities should recognize the cost of pensions and other postemployment benefits during their employees' active years of service. The cost recognized includes the amount contributed by the employing entity and the portion contributed by other entities on the entity’s behalf, which is called an imputed cost.”

FASAB SFFAS No. 4, “Managerial Cost Accounting Standards and Concepts”:

“Costs that are incurred by one entity but paid by another entity, and that benefit the reporting entity, should be recognized by the reporting entity as imputed costs and imputed financing.”

OMB Circular A-136, Section II.2.7.3:

“Imputed costs are to be recognized for the costs of goods and services received from other federal entities at no or reduced cost, such as pension and postretirement health benefits...”

Therefore, answer choice C is correct: the agency recognizes the imputed cost.

Disclaimer: This custom GPT is continuously improving, but it may not always provide accurate information and can make mistakes. Validate important information for relevancy, completeness and accuracy with your subject matter experts (SMEs).

The city issues $100,000 in general obligation bonds on April 1, 2024, and the first principal payment of $10,000 is due on March 31, 2025. The interest rate is 5% annually on the unpaid principal balance.

As of April 1, 2024, the full $100,000 is outstanding. For the full fiscal year (April 1, 2024 to March 31, 2025), interest accrues on the full amount until payment is made. The interest on $100,000 for one year at 5% =

Interest Expense = $100,000 × 5% = $5,000

Note: Interest is typically calculated on the beginning-of-period balance, and since the payment is made at the end of the year (March 31, 2025), the full $5,000 interest is recognized for that year.

Relevant Standards and References:

GASB Statement No. 34, Basic Financial Statements for State and Local Governments

GASB Codification Section 2200 (Government-Wide Financial Statements)

GFOA Guidance on Long-Term Debt Accounting

The "pass back" is a step in the federal budget process during which the Office of Management and Budget (OMB) communicates to federal agencies what parts of their budget requests it has approved or rejected. It precedes the preparation of the President’s Budget and gives agencies a chance to appeal decisions before final submission.

Other options:

Allotment: An internal division of an appropriation.

Rescission: A cancellation of budget authority.

Apportionment: OMB’s formal distribution of funds over time, typically quarterly.

Relevant References:

OMB Circular A-11 – Preparation, Submission, and Execution of the Budget

GAO Glossary of Budgetary Terms

Congressional Budget Office (CBO) – Federal Budget Process

Answer: A. pass back

Comprehensive Detailed Explanation:

Internal service funds are proprietary funds used to account for the operations of departments or functions that provide goods or services to other departments within the same government on a cost-reimbursement basis. Examples include:

Centralized IT/data processing

Fleet management

Print shops or mail centers

These are not used for general public services, capital acquisitions, or restricted revenues (which belong in special revenue or capital projects funds).

Relevant References:

GASB Statement No. 34 – Fund Types

GASB Codification Section 1300 – Internal Service Funds

GFOA Fund Accounting Best Practices

Answer: D. financing of services provided to other governmental units on a cost reimbursement basis.

OMB Circular A-136 specifies the required components of the Agency Financial Report (AFR), which include:

A Message from the Head of the Agency

Management’s Discussion and Analysis (MD&A)

Financial Section (including statements and notes)

Other Information (e.g., improper payments, internal controls)

The Performance Section is not included in the AFR but is instead part of the alternative Performance and Accountability Report (PAR) or included separately in an Annual Performance Report (APR).

Relevant References:

OMB Circular A-136 – Financial Reporting Requirements (Section II)

GPRA Modernization Act of 2010

CFO Act of 1990

Answer: D. the performance section

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.

An internal service fund is used to account for goods or services provided by one department or agency to other departments or agencies of the governmental unit, typically on a cost-reimbursement basis.

To establish accurate billing rates (e.g., hourly rates), the fund must use actual costs of providing services. This includes materials consumed, labor, depreciation, and overhead. Materials purchased but not used should not be included in the rate calculation for the current period.

Relevant Standards and References:

FASAB SFFAS No. 4, Managerial Cost Accounting

GASB Codification Section 1800, Internal Service Funds

GFOA Best Practices – Internal Service Fund Rate Setting

Therefore, Option A is correct.

Fund Balance with Treasury (FBWT) increases when an agency receives a Treasury warrant. A warrant is the official document issued by the U.S. Treasury that provides budgetary authority to the agency and establishes funds available for obligation and disbursement.

Other options:

Rescission of appropriation → decreases FBWT

Recovery of prior-year obligations → may restore budgetary authority, but not necessarily FBWT

Custodial revenue → collected on behalf of others; not retained by the collecting agency

Relevant References:

Treasury Financial Manual (TFM), Volume I, Part 2, Chapter 5100

FASAB SFFAS No. 1 – Fund Balance with Treasury

USSGL Guidance on Fund Balance Transactions

Answer: A. receipt of a Treasury warrant

When a federal entity pays off a payable:

Budgetary accounting moves the status of the obligation from unpaid to paid

Proprietary accounting reduces the payable and cash (Fund Balance with Treasury)

The correct journal entry is:

Budgetary:

 Debit Delivered Orders – Obligations, Unpaid

 Credit Delivered Orders – Obligations, Paid

Proprietary:

 Debit Accounts Payable

 Credit Fund Balance with Treasury

This reflects the transition from an unpaid liability to a disbursed payment, complying with federal financial reporting.

Relevant References:

Treasury Financial Manual (TFM) Vol. I, Part 2, Chapter 4700

FASAB SFFAS No. 1 and No. 7 – Accounting for Liabilities and Budgetary Resources

USSGL (U.S. Standard General Ledger) – Posting Logic for Obligation Transactions

Answer: D. Debit Delivered Orders – Obligations, Unpaid; Credit Delivered Orders – Obligations, Paid; Debit Accounts Payable; Credit Fund Balance with Treasury

The Federal Accounting Standards Advisory Board (FASAB) establishes Generally Accepted Accounting Principles (GAAP) for federal government entities. FASAB is recognized by the American Institute of Certified Public Accountants (AICPA) as the authoritative source of GAAP for federal agencies.

Other agencies:

OMB: Issues financial reporting guidance and formats (e.g., A-136), but does not set GAAP.

GAO: Audits financial statements and issues internal control guidance.

FASB: Sets GAAP for private sector and some not-for-profit organizations—not federal.

Relevant References:

FASAB Memorandum of Understanding (GAO, Treasury, OMB)

AICPA Rule 203 Designation of FASAB as the GAAP Authority

SFFAS No. 34 – The Hierarchy of GAAP

Answer: A. FASAB