GAFRB Exam Dumps - Examination 2: Governmental Accounting, Financial Reporting and Budgeting (GAFRB)

Research and development (R&D) costs are generally expensed when incurred. However, capitalization may occur only if the asset has an "alternative future use." This means it can be used in other projects or for other purposes beyond the specific R&D effort.

This principle aligns with both federal and private-sector accounting under FASAB and FASB standards.

Relevant References:

FASAB SFFAS No. 10 – Accounting for Internal Use Software

FASB ASC 730 – Research and Development

GAO Red Book – Capitalization Guidelines

Answer: D. have alternative future use

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

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 "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

The first and most appropriate action for the state Medicaid director is to inform the governor. This ensures that executive leadership is aware of the fiscal shortfall early and can weigh in on how to proceed. The governor plays a central role in budget planning and proposing supplemental appropriations.

While informing legislators or freezing spending may be necessary later, those steps should occur after executive leadership has been notified and involved in decision-making.

Relevant References:

GFOA Best Practices – Budget Monitoring and Adjustment

State Budget Procedures Manuals (varies by state, but consistent in escalation path)

National Association of State Budget Officers (NASBO) Guidance

Answer: A. Inform the governor of the situation and options for addressing the shortfall

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

According to GASB Statement No. 96 (Subscription-Based Information Technology Arrangements or SBITAs), a subscription agreement is considered “short-term” if the maximum possible term (including renewal options) is 12 months or less.

Short-term SBITAs are not reported as subscription liabilities and are accounted for as outflows (expenses or expenditures) when incurred.

Relevant References:

GASB Statement No. 96 – SBITAs (Issued May 2020)

GASB Implementation Guide No. 2021-1 – Q&A on SBITAs

GFOA Advisory – Cloud Computing and Subscription Agreements

Answer: B. 12 months

Under FASAB standards, specifically SFFAS No. 4, Managerial Cost Accounting Standards, the full cost of an output includes:

Direct costs (e.g., direct material and labor)

Indirect costs (e.g., inter-entity costs, overhead, services)

In-kind contributions

Any support service costs

Depreciation or amortization, if applicable

We will now compute the full cost of all 5 units and then divide by 5 to obtain the cost per unit.

Step 1: List and sum all relevant costs.

Direct Material: $11,267,000

Direct Labor: $5,980,000

Inter-entity Costs: $1,500,000

Accounting and Contracting Services: $500,000

Physical and Data Security: $700,000

In-kind Logistics Services: $500,000

Warehouse Lease: $1,000,000

Parking Lot Construction: $3,000,000

Equipment Installation: $600,000

New Employee Training: $100,000

Total Full Cost =

$11,267,000

$5,980,000

$1,500,000

$500,000

$700,000

$500,000

$1,000,000

$3,000,000

$600,000

$100,000

= $25,147,000

Step 2: Calculate cost per unit (based on 5 outputs):

Cost per unit = $25,147,000 ÷ 5 = $5,029,400

But the question specifically asks:

“Based on FASAB standards, calculate the full cost of 1 unit of an output…”

So, the correct answer (full cost of all units) is:

Answer: D. $25,147,000

If they had asked for cost per unit, then the answer would be:

= $5,029,400 → Option C

Note: Option C is a distractor here and would only be correct if the question specifically asked for per unit cost.

Relevant Standards and References:

FASAB Statement of Federal Financial Accounting Standards (SFFAS) No. 4: Managerial Cost Accounting Concepts and Standards

OMB Circular A-136: Financial Reporting Requirements

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

Therefore, the correct answer to the full cost (not per unit) is:

Answer: D. $25,147,000.