CPA Exam: FAR · Financial Reporting
CPA Exam: FAR: State and Local Governments Concepts
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Overview
This chapter explains how states, cities, counties, and school districts report. A government keeps its records in separate funds, each a self-balancing set of accounts for a purpose. The annual report has two layers: fund financial statements, which show each major fund, and government-wide statements, which show the government as a whole.
Governmental funds, such as the general fund and special revenue funds, use the current financial resources measurement focus and the modified accrual basis. Revenue is recognized when it is measurable and available, meaning collected soon enough to pay this period's bills, and expenditures are recognized when the liability is incurred, with exceptions like debt service on long-term debt recorded when due. Capital assets and long-term debt are not reported in governmental fund balance sheets.
Government-wide statements use the economic resources measurement focus and full accrual accounting, much like a business. They include capital assets, depreciation, and long-term debt. Because the two layers use different rules, a reconciliation explains the differences, such as capital outlays that are expenditures in the funds but assets government-wide, and bond proceeds that are an other financing source in the funds but a liability government-wide.
Key concepts
Fund categories
Governmental funds (general, special revenue, capital projects, debt service, permanent), proprietary funds (enterprise and internal service), and fiduciary funds (such as pension trust and custodial funds).
Memory tipFiduciary funds hold resources for others and are left out of the government-wide statements.
Source: GASB Statements 34 and 84 · as of 2026
Modified accrual basis
Used by governmental funds. Revenues are recognized when measurable and available to pay current-period liabilities. Expenditures are generally recognized when the fund liability is incurred.
Memory tipLong-term debt principal and interest are generally recorded as expenditures when due.
Source: GASB Statement No. 34 · as of 2026
Government-wide statements
The statement of net position and the statement of activities, prepared on the economic resources focus and full accrual basis. They report governmental activities and business-type activities separately.
Memory tipCapital assets and long-term debt of governmental funds appear here, not in fund statements.
Source: GASB Statement No. 34 · as of 2026
Fund balance classes
Governmental fund balance is reported as nonspendable, restricted, committed, assigned, and unassigned. Only the general fund normally reports a positive unassigned amount.
Memory tipCommitted comes from the government's highest decision-making body; restricted comes from outside parties or law.
Source: GASB Statement No. 54 · as of 2026
Reconciliation items
Common items that explain the move from governmental fund balances to government-wide net position: capital assets added, depreciation, long-term debt and its repayment, and revenues not yet available.
Memory tipBond proceeds are an other financing source in the funds but a liability in government-wide statements.
Source: GASB Statement No. 34 · as of 2026
Often tested
- Governmental funds: current financial resources focus, modified accrual.
- Proprietary funds and government-wide statements: economic resources focus, full accrual.
- Fiduciary funds are not included in government-wide statements.
- Buying a capital asset is an expenditure in a governmental fund but an asset government-wide.
- Fund balance has five classes, from nonspendable to unassigned.
Easy to confuse: Governmental funds vs. government-wide statements
| Item | Governmental funds | Government-wide |
|---|---|---|
| Measurement focus | Current financial resources | Economic resources |
| Basis of accounting | Modified accrual | Full accrual |
| Capital assets | Expenditure when bought | Asset, then depreciated |
| Bond issued | Other financing source | Long-term liability |
3 sample questions
Verified practice questions from this unit.
Question 1. Which measurement focus and basis of accounting do governmental funds (such as the general fund) use in their fund financial statements?
- ① Economic resources measurement focus and accrual basis
- ② Current financial resources measurement focus and modified accrual basis
- ③ Current financial resources measurement focus and full accrual basis
- ④ Economic resources measurement focus and cash basis
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Answer: ② Current financial resources measurement focus and modified accrual basis
Key point: Gov. funds: current fin. resources + modified accrual
Governmental funds focus on near-term spendable resources, so they use the current financial resources measurement focus and the modified accrual basis. Revenues are recognized when measurable and available, and capital assets and long-term debt are not reported in these funds.
Wrong choices
- Economic resources measurement focus and accrual basis: This is used in government-wide statements and proprietary funds, not governmental funds.
- Current financial resources measurement focus and full accrual basis: Governmental funds pair the current financial resources focus with the modified accrual basis.
- Economic resources measurement focus and cash basis: No GAAP fund statement uses the cash basis.
Question 2. A city operates a water utility that charges residents and businesses user fees intended to cover its costs. Which fund type should the city use for the utility?
- ① Internal service fund
- ② Enterprise fund
- ③ Special revenue fund
- ④ Custodial fund
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Answer: ② Enterprise fund
Key point: Fees charged to the public → enterprise fund
Enterprise funds are proprietary funds for activities that charge fees to outside users, such as water, sewer, and transit services. They use the economic resources measurement focus and the accrual basis, like a business.
Wrong choices
- Internal service fund: Internal service funds sell goods or services mainly to other departments of the same government, not to the public.
- Special revenue fund: Special revenue funds account for restricted or committed revenue sources, not fee-based business activities.
- Custodial fund: Custodial funds hold resources for others; they are fiduciary, not business-type.
Question 3. Which funds are excluded from a state or local government's government-wide financial statements?
- ① Fiduciary funds
- ② Enterprise funds
- ③ Internal service funds
- ④ Capital projects funds
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Answer: ① Fiduciary funds
Key point: Government-wide statements exclude fiduciary funds
Government-wide statements report the government's own resources. Fiduciary funds hold resources for others (such as pension trusts and custodial funds), so they cannot be used to support the government's programs and are reported only in the fiduciary fund statements.
Wrong choices
- Enterprise funds: Enterprise funds are reported in the business-type activities column.
- Internal service funds: Internal service funds are usually folded into governmental activities.
- Capital projects funds: Capital projects funds are governmental funds and are included in governmental activities.