QUESTION: 6

For state and local governments, a fund that is legally restricted to the use of earnings with the principal protected is

an enterprise fund.
a permanent fund.
an internal service fund.
a general fund.

Answer(s): B

Explanation:

A permanent fund is a governmental fund used to report resources that are legally restricted so that only earnings (not principal) may be used to support government programs. These are typically endowments where the corpus is preserved in perpetuity.

According to GASB Statement No. 34, permanent funds are classified under governmental funds and must be used to benefit the government or its citizenry.

Relevant Standards and

Reference:

GASB Statement No. 34, Basic Financial Statements--and Management's Discussion and Analysis-- for State and Local Governments

GASB Codification Section 1300, Fund Types

GFOA Budgeting & Fund Balance Guidance

Therefore, Option B is correct.

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QUESTION: 7

A local government is evaluating different financing options for an upcoming capital project.
Which of the following debt instruments will typically offer the lowest interest rate?

commercial paper
general obligation bonds
revenue bonds
certificate of deposit

Answer(s): B

Explanation:

General obligation (GO) bonds are backed by the full faith and credit of the issuing government, meaning they are secured by the government's taxing power. Because of this strong security, GO bonds typically carry lower interest rates compared to other financing options like revenue bonds or commercial paper.

Revenue bonds, by contrast, are supported only by the revenues from a specific project or source (e.g., tolls or utility fees), which generally results in higher perceived risk and thus higher interest rates. Certificates of deposit are not debt instruments used for financing projects but rather for investment.

Relevant Standards and

Reference:

GFOA Best Practices Debt Management

Government Finance Officers Association (GFOA) Debt 101

MSRB (Municipal Securities Rulemaking Board): GO vs. Revenue Bonds

GASB Concepts Statement No. 1, Objective of Financial Reporting

Therefore, Option B is correct.

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QUESTION: 8

If an internal service fund needs to develop an hourly billing rate, the calculation should include

all materials consumed during the year.
the acquisition cost of equipment purchased during the year.
the replacement cost of equipment purchased during the year.
all materials purchased during the year, even if the materials were not consumed.

Answer(s): A

Explanation:

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

Reference:

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.

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QUESTION: 9

A city issues S100,000 of 10-year general obligation bonds on April 1, 2024. Debt service of $10,000 must be paid each year on March 31, with 5% interest paid on the unpaid balance. Based upon this information, the interest expense reported on the government-wide statement for fiscal year ending March 31, 2025, is

$ 3,750.
$ 4,500.
$5,000.
$15.000.

Answer(s): C

Explanation:

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

Reference:

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

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QUESTION: 10

Which of the following revenue sources is an exchange-like transaction?

income taxes
operating permits
fines
grants

Answer(s): B

Explanation:

Exchange and exchange-like transactions occur when each party receives and gives up essentially equal value. In the case of operating permits (e.g., business licenses or environmental permits), the payer receives a direct and proportional benefit in exchange for the fee paid, making this an exchange-like transaction.

In contrast:

Income taxes and fines are non-exchange revenues.

Grants may or may not be exchange-like, depending on stipulations, but generally are non-exchange.

Relevant Standards and

Reference:

GASB Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions

GASB Codification Section N50, Nonexchange Transactions

GFOA Best Practices Revenue Recognition

Therefore, Option B is correct.

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Free Financial GAFRB Exam Questions (page: 3)

QUESTION: 6

Explanation:

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QUESTION: 7

Explanation:

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QUESTION: 8

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QUESTION: 9

Explanation:

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QUESTION: 10

Explanation:

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