Try 10 focused Certified Public Accountant Business Analysis and Reporting (CPA BAR) questions on governmental funds, modified accrual, government-wide statements, and reporting differences.
CPA means Certified Public Accountant. BAR means Business Analysis and Reporting. Use this focused page when your CPA BAR misses are about governmental funds, modified accrual, government-wide statements, budgetary reporting, or fund-to-government-wide reconciliation. Drill this topic before returning to mixed practice.
| Field | Detail |
|---|---|
| Exam route | CPA BAR |
| Issuer | American Institute of Certified Public Accountants (AICPA) |
| Topic area | State and Local Governments |
| Blueprint weight | 15% |
| Page purpose | Governmental-accounting practice for funds, modified accrual, government-wide statements, and reconciliation logic |
This topic tests whether you can switch between governmental reporting perspectives. Strong answers identify whether the stem is asking about governmental funds, proprietary or fiduciary funds, government-wide statements, modified accrual, accrual, budgetary reporting, or reconciliation.
Before calculating, name the reporting level and measurement basis. Then decide whether the fact affects fund statements, government-wide statements, both, or only reconciliation. Most wrong answers apply a valid rule to the wrong reporting perspective.
Use this page to isolate State and Local Governments for CPA BAR. Work through the 10 questions first, then review the explanations and return to mixed practice in Mastery Exam Prep.
| Pass | What to do | What to record |
|---|---|---|
| First attempt | Answer without checking the explanation first. | The fact, rule, calculation, or judgment point that controlled your answer. |
| Review | Read the explanation even when you were correct. | Why the best answer is stronger than the closest distractor. |
| Repair | Repeat only missed or uncertain items after a short break. | The pattern behind misses, not the answer letter. |
| Transfer | Return to mixed practice once the topic feels stable. | Whether the same skill holds up when the topic is no longer obvious. |
Blueprint context: 15% of the practice outline. A focused topic score can overstate readiness if you recognize the pattern too quickly, so use it as repair work before timed mixed sets.
These questions are original Mastery Exam Prep practice items aligned to this topic area. They are designed for self-assessment and are not official exam questions.
Topic: State and Local Governments
A city’s draft ACFR omits the Riverfront Public Facilities Authority from the basic financial statements and includes only a short MD&A paragraph describing the authority’s activities. The authority is legally separate, issues its own revenue bonds, and charges user fees to the public. The mayor appoints all five voting members of the authority’s board, and the city council must approve the authority’s annual budget and rate changes. The authority does not provide services exclusively, or almost exclusively, to the city government. What is the best correction to the ACFR presentation?
Best answer: C
What this tests: State and Local Governments
Explanation: The authority should be reported as a discretely presented component unit, not merely discussed in MD&A.
A legally separate organization is included in a primary government’s reporting entity when the primary government is financially accountable for it. Financial accountability can exist when the primary government appoints a voting majority of the organization’s board and can impose its will, such as by approving budgets or rate changes. Here, those facts require inclusion in the ACFR. Because the authority charges the public and does not provide services exclusively, or almost exclusively, to the city government, it should not be blended with the city’s funds. The appropriate correction is discrete presentation in the basic financial statements, with related note disclosures. MD&A may discuss the authority, but MD&A is required supplementary information and cannot substitute for proper reporting entity presentation.
The city is financially accountable because it appoints the voting majority and can impose its will, but blending is not appropriate because the authority does not primarily serve the city itself.
Topic: State and Local Governments
West City’s fiscal year ends June 30, 20X6. The General Fund uses modified accrual accounting. A reviewer concluded that selected year-end General Fund expenditures should be $1,180,000. Which government fund record best supports that conclusion?
Best answer: A
What this tests: State and Local Governments
Explanation: Modified accrual expenditures include current-period incurred liabilities and matured debt service, not encumbrances, unmatured interest, depreciation, or cash-basis timing items.
Under modified accrual accounting for governmental funds, expenditures generally are recognized when the related fund liability is incurred and payable from current financial resources. For debt service on long-term debt, governmental funds generally recognize principal and interest expenditures when they mature and become due. Therefore, the support should include goods and services received by year-end, payroll earned by year-end, and debt service that matured on June 30. Those amounts are $760,000 + $320,000 + $100,000 = $1,180,000. Open purchase orders for goods not received are encumbrances, not expenditures. Unmatured interest and depreciation are full accrual or government-wide concepts, not General Fund modified accrual expenditures.
This support identifies incurred fund liabilities and matured debt service totaling $1,180,000 while excluding encumbrances for goods not received.
Topic: State and Local Governments
A city’s General Fund paid a $250,000 construction invoice that was legally budgeted and financed by a capital projects fund. The General Fund did not provide goods or services to the capital projects fund, and the capital projects fund repaid the General Fund for the exact invoice amount before year-end. How should this activity be classified and presented in the governmental fund financial statements?
Best answer: B
What this tests: State and Local Governments
Explanation: This is a reimbursement because one fund repaid another for a cost it was responsible for paying.
Interfund reimbursements occur when one fund initially pays an expenditure or expense that another fund is responsible for, and the responsible fund repays the paying fund. The accounting should place the expenditure in the fund that is actually responsible for the activity. Therefore, the capital projects fund reports the construction expenditure, while the General Fund reverses or reduces the expenditure it initially recorded. This differs from a transfer, which is a nonreciprocal flow of resources with no repayment requirement; services provided and used, which involve one fund selling goods or services to another; and internal balances, which are amounts due between governmental and business-type activities in government-wide reporting.
A repayment to the fund that initially paid a cost for which another fund is responsible is a reimbursement, not revenue, a transfer, or a loan.
Topic: State and Local Governments
Meadow City received cash during the year and began incurring costs for a new public works garage. The finance director concluded that the receipt and related construction expenditures should be reported in a capital projects fund. Which source record best supports that conclusion?
Best answer: D
What this tests: State and Local Governments
Explanation: The bond ordinance and project ledger directly support capital projects fund reporting.
Governmental funds are classified based on the purpose and legal constraints on the financial resources. A capital projects fund is used for resources that are restricted, committed, or assigned for acquiring or constructing major capital facilities, other than those financed by proprietary or fiduciary funds. The best support is therefore a source record showing that the cash was bond proceeds legally restricted for the garage construction and that related costs are tracked to that project. That evidence directly connects both the resource inflow and expenditures to a major capital facility project, supporting capital projects fund reporting rather than general operating, debt service, or permanent fund reporting.
A capital projects fund accounts for financial resources restricted, committed, or assigned to acquiring or constructing major capital facilities.
Topic: State and Local Governments
A city is reviewing draft classifications in its ACFR before issuance.
| Statement or column | Measurement focus and basis | Resource or constraint | Draft classification |
|---|---|---|---|
| Government-wide statement of net position—governmental activities | Economic resources/accrual | State grant cash externally restricted for police training | Restricted net position |
| Capital Projects Fund balance sheet | Current financial resources/modified accrual | Unspent bond proceeds legally restricted to construct a fire station | Restricted fund balance |
| Government-wide statement of net position—business-type activities | Economic resources/accrual | Utility cash set aside by management for future equipment replacement; no external or legal restriction | Assigned fund balance |
| General Fund balance sheet | Current financial resources/modified accrual | Spendable resources constrained by city council ordinance; same action required to remove constraint | Committed fund balance |
Which correction should the city make?
Best answer: B
What this tests: State and Local Governments
Explanation: The only incorrect draft classification is the use of fund balance terminology in a government-wide statement.
Government-wide statements use the economic resources measurement focus and accrual basis and report net position as net investment in capital assets, restricted, or unrestricted. Governmental fund balance sheets use the current financial resources measurement focus and modified accrual basis and report fund balance as nonspendable, restricted, committed, assigned, or unassigned. The utility amount appears in a government-wide statement, so fund balance classifications do not apply. Because the equipment replacement set-aside is only an internal management designation and is not externally or legally restricted, it should be reported as unrestricted net position.
Government-wide statements use net position classifications, and an internal management set-aside without an external or legal restriction is unrestricted net position.
Topic: State and Local Governments
A city is preparing the reconciliation from the governmental funds statement of revenues, expenditures, and changes in fund balances to the government-wide statement of activities for governmental activities. The governmental funds reported a $2,400,000 increase in fund balances for the year.
Conversion worksheet facts:
| Item | Amount |
|---|---|
| Capital outlay recorded as expenditures in governmental funds | $5,100,000 |
| Depreciation expense on governmental activities capital assets | $2,800,000 |
| Bond proceeds recorded as other financing sources in governmental funds | $4,000,000 |
| Principal payments on long-term debt recorded as expenditures | $1,200,000 |
| Increase in property tax revenues earned but unavailable in governmental funds | $300,000 |
| Increase in compensated absences liability for governmental activities | $150,000 |
| Internal service fund net income, predominantly serving governmental departments | $90,000 |
Which amount is the change in government-wide net position for governmental activities?
Best answer: B
What this tests: State and Local Governments
Explanation: The governmental activities change in net position is $2,140,000.
The reconciliation starts with the governmental funds change in fund balances of $2,400,000 and adjusts for government-wide accrual accounting and economic resources measurement. Capital outlay is added back because it was an expenditure in the funds but is capitalized government-wide. Depreciation is subtracted because it is an expense only at the government-wide level. Bond proceeds are subtracted because they increased fund balance but are liabilities, not revenue, government-wide. Principal payments are added back because they reduced fund balance but reduce liabilities, not expenses. The increase in earned but unavailable property taxes is added because government-wide statements recognize revenue when earned, not when available. The increase in compensated absences liability is subtracted, and the internal service fund income is added because it primarily serves governmental activities. The schedule is: $2,400,000 + $5,100,000 - $2,800,000 - $4,000,000 + $1,200,000 + $300,000 - $150,000 + $90,000 = $2,140,000 increase.
This amount adds capital outlay, principal payments, unavailable earned revenue, and internal service fund income, and subtracts depreciation, bond proceeds, and the increase in compensated absences.
Topic: State and Local Governments
A city operates a water utility enterprise fund. During preparation of the fund’s statement of revenues, expenses, and changes in fund net position, the accountant concludes that a $750,000 state receipt should be presented as a capital contribution rather than as operating revenue. Which source support best supports that conclusion?
Best answer: C
What this tests: State and Local Governments
Explanation: Capital grants for proprietary funds are reported as capital contributions, not operating revenue.
Proprietary funds use the economic resources measurement focus and accrual basis. Their statement of revenues, expenses, and changes in fund net position separates operating revenues and expenses from nonoperating items, then reports capital contributions and transfers in determining the change in net position. A state receipt restricted to construction or acquisition of capital assets is not consideration for providing water services to customers. The signed grant agreement and reimbursement request directly support both the purpose of the receipt and its relation to eligible capital costs incurred before year-end, making it the strongest support for capital contribution presentation.
A restriction to finance capital asset construction supports reporting the receipt as a capital contribution in a proprietary fund.
Topic: State and Local Governments
Oak City is preparing its government-wide statement of activities for the year ended December 31, 20X5. The following General Fund trial balance amounts and supporting documentation relate to the public works function:
| Item | Amount |
|---|---|
| Public works operating expenditures | $1,900,000 |
| Capital outlay—public works equipment | $700,000 |
| Operating grant restricted for public works maintenance | $650,000 |
| Capital grant restricted for public works equipment | $500,000 |
Supporting documentation:
What amount should Oak City report as net expense for public works in the governmental activities column of the statement of activities?
Best answer: B
What this tests: State and Local Governments
Explanation: Convert fund expenditures to government-wide expenses and subtract related program revenues.
In the government-wide statement of activities, governmental activities are reported using the economic resources measurement focus and accrual basis. Capital outlay is not reported as an expense when the asset is capitalized; instead, depreciation is reported over the asset’s useful life. Public works expenses therefore include operating expenditures of $1,900,000, depreciation of $280,000, and the $30,000 increase in compensated absences, for total expenses of $2,210,000. Both the operating grant restricted for public works maintenance and the capital grant restricted for public works equipment are program revenues of the public works function. Program revenues total $1,150,000. Net expense is $2,210,000 minus $1,150,000, or $1,060,000.
Public works expenses are $2,210,000 and program revenues are $1,150,000, resulting in net expense of $1,060,000.
Topic: State and Local Governments
A city’s draft ACFR reports the legally separate Civic Facilities Corporation in a discretely presented component unit column. The corporation issues debt to construct facilities used by city departments. The city council also serves as the corporation’s governing board, the city manager directs the corporation’s operations, and the city is expected to pay substantially all debt service from city resources. What is the best correction to the draft ACFR?
Best answer: D
What this tests: State and Local Governments
Explanation: The component unit should be blended, not discretely presented.
Component units are usually discretely presented, but GASB requires blending when certain close-relationship criteria are met. Blending is appropriate when the component unit’s governing body is substantively the same as the primary government’s governing body and there is either a financial benefit or burden relationship or operational responsibility by the primary government’s management. Blending is also required when a component unit provides services entirely or almost entirely to the primary government, or when substantially all of its debt is expected to be repaid from primary government resources. Here, the city council is the corporation’s board, the city manager directs operations, and the city is expected to pay substantially all debt service. The draft ACFR should therefore report the corporation as blended, as if it were part of the city, rather than in a separate discrete component unit column.
The facts meet blending criteria because the governing body is substantively the same and city management has operational responsibility, with debt expected to be repaid from city resources.
Topic: State and Local Governments
Metro City’s General Fund uses encumbrance accounting and reports on the modified accrual basis. On December 20, 20X5, the city issued a purchase order for $120,000 of operating supplies and recorded an encumbrance. The supplies were received on December 28, 20X5, and the approved invoice was $118,000. The city made no year-end entry because the invoice will be paid in January 20X6. What is the best year-end correction in the General Fund?
Best answer: B
What this tests: State and Local Governments
Explanation: The purchase order created an encumbrance, but receipt of the supplies created an actual General Fund expenditure and payable.
In a governmental fund, an encumbrance is a budgetary control entry for a purchase order or commitment; it is not an actual liability or expenditure. Once the supplies are received and the invoice is approved, the transaction becomes an actual modified-accrual event. The General Fund should recognize an expenditure for the amount of the approved invoice and a vouchers payable liability because the goods were received before year-end and payment is due. The prior encumbrance should be liquidated so the same commitment is not also reported as outstanding. Because this is the General Fund, the actual transaction is reported as an expenditure, not an expense, in the fund financial statements.
When goods are received and the liability is incurred, the General Fund recognizes an expenditure and payable, while the related encumbrance is removed.
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