Free Practice Questions for AGA GAFRB Exam

Comprehensive Detailed Explanation:

Interperiod (or intergenerational) equity is the concept that current-year revenues should be sufficient to pay for current-year services, so that future taxpayers are not burdened with today's costs.

GASB incorporates interperiod equity as a core principle when developing financial reporting standards, especially to evaluate whether financial reporting helps users assess if the government is living within its means.

Relevant References:

GASB Concepts Statement No. 1 – Objectives of Financial Reporting

GASB Statement No. 34 – Emphasizes accountability and long-term sustainability

GFOA Budgeting Best Practices

Answer: C. issuing financial reporting guidelines

The formal financial statements of a state or local government include:

Basic Financial Statements (government-wide and fund statements)

Notes to the Financial Statements

Required Supplementary Information (RSI), including MD&A and pension data

The auditor’s letter (i.e., Independent Auditor’s Report) is included in the financial section of the ACFR but is not technically part of the financial statements themselves. It is a separate document providing the auditor's opinion.

Relevant References:

GASB Statement No. 34

GFOA ACFR Reporting Guide

AICPA Governmental Audit Guide

Answer: D. auditor’s letter

Comprehensive Detailed Explanation:

Year-end wasteful spending (also known as “use-it-or-lose-it” spending) often occurs because agencies rush to obligate funds before they expire at fiscal year-end. Providing multi-year appropriations reduces this pressure by allowing agencies to obligate funds over a longer period, thus promoting better planning and reducing unnecessary or rushed spending.

Relevant References:

GAO Red Book – Appropriations Law

OMB Circular A-11 – Budget Execution

Congressional Budget Office (CBO) Reports on Year-End Spending

Answer: D. multi-year appropriation authority

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.

Although the building is listed on the National Register of Historic Places (a heritage asset), renovations that support current operations and serve general purposes (e.g., office upgrades) are considered capitalizable or expensed under general property, plant, and equipment (G-PP&E), not stewardship or heritage classifications.

Stewardship or heritage classifications apply to assets whose primary purpose is historical preservation, not ongoing operations.

Relevant References:

FASAB SFFAS No. 29 – Heritage Assets and Stewardship Land

FASAB SFFAS No. 6 – General PP&E Accounting

OMB Circular A-136 – Capital Asset Guidance

Answer: D. general property, plant and equipment expense

Federal principal financial statements are required under OMB Circular A-136 and FASAB standards. They include:

Statement of Budgetary Resources (SBR)

Balance Sheet

Statement of Net Cost

Statement of Changes in Net Position

Statement of Custodial Activity (if applicable)

There is no “Statement of Cash Flows” or “Statement of Net Income” in federal accounting — those are private-sector financial statements.

Relevant References:

OMB Circular A-136

FASAB SFFAS No. 53 – Principal Financial Statements

Treasury Financial Manual (TFM) Volume I

Answer: B. Statement of Budgetary Resources

Comprehensive Detailed Explanation:

In governmental funds (using the modified accrual basis), expenditures are recorded when financial resources are used — typically when cash is disbursed. However, in government-wide statements (accrual basis), only the portion of the asset’s cost consumed in the period is recorded as an expense (i.e., depreciation).

Paying for capital assets such as vehicles is an expenditure in the governmental funds, but not an expense in the accrual-based government-wide financials. Instead, the cost is capitalized and depreciated over time.

Relevant References:

GASB Statement No. 34 – Government-wide vs. Fund Financial Reporting

GASB Codification Section 1300 – Modified Accrual Accounting

GFOA Best Practices – Capital Asset Reporting

Answer: C. At the end of the fiscal year, the government pays for ten vehicles which will be depreciated over five years.

The $900,000 paid to the construction manager and $100,000 paid to the architect are capitalized as part of the building's total cost, totaling $1,000,000.

Using straight-line depreciation over 50 years with the half-year convention:

Annual depreciation = $1,000,000 ÷ 50 = $20,000

Since the half-year convention is used in the year the asset is placed in service, only 50% of the full-year depreciation is recorded.

Depreciation for the current year = $20,000 × 0.5 = $10,000

However, note: since both amounts ($900,000 + $100,000) were paid during construction and the school was completed and placed into service this year, the full capitalized amount applies.

GASB and GAAP allow the half-year rule unless the asset was placed into service at the beginning of the year. In this case, since placed during the year, the half-year rule applies.

Correct depreciation for the first year = $10,000

So, the correct answer is:

Answer: B. $10,000

Correction Note: While option C ($20,000) may seem valid for full-year depreciation, the use of the "half-year depreciation method" dictates that only half of the full-year amount is expensed in the first year.

Relevant References:

GASB Statement No. 34 – Capital Assets and Depreciation

GFOA Best Practices on Capital Asset Accounting and Reporting

The governmental fund category is used to account for the core services of a government that are primarily supported by taxes and other non-exchange revenues. These services include public safety, education, health, transportation, and social services. It includes the general fund, special revenue funds, capital projects funds, debt service funds, and permanent funds.

While option D (general fund) is technically a fund within the governmental category, the broader and more accurate classification is "governmental."

Relevant References:

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

GASB Codification Section 1300 – Fund Types

GFOA Fund Structure Guidance

Answer: B. governmental

═════════════════