Most candidates fail CGFM Exam 2 because they treat governmental accounting like corporate accounting with extra steps. This is a fatal error, as the entire logic of funds, measurement focus, and basis of accounting is fundamentally different and requires you to unlearn private-sector habits.
These free CGFM Exam 2 practice questions cover governmental accounting, financial reporting, and budgeting based on the 2026 AGA blueprint. They test your judgment on GASB standards, FASAB rules, fund accounting, and budgetary entries to reveal your weak areas before exam day.
Key facts
- Exam Name: Governmental Accounting, Financial Reporting & Budgeting (CGFM Exam 2)
- Official Body: Association of Government Accountants (AGA)
- Passing Score: 500 on a 200-700 scale
- Number of Questions: 115 multiple-choice questions
- Time Limit: 2 hours and 15 minutes (135 minutes)
- Key Topics: GASB standards, FASAB standards, fund accounting, budgetary accounting
Why Are These CGFM Exam 2 Questions Different?
These questions are not a simple knowledge check. They are designed to mirror the judgment-based scenarios you will face on the actual CGFM Exam 2. I’ve written them to target the most common traps and misconceptions I’ve seen trip up hundreds of candidates over the years.
The questions align with the 2026 AGA content blueprint, covering core competencies in governmental accounting. As you work through them, don't just find the right answer. Force yourself to articulate why the other options are wrong. That is the skill that separates passing from failing.
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CGFM Exam 2 Practice Questions and Explanations
Read each question carefully, eliminate the obvious distractors, and select the best possible answer. The detailed explanations that follow are where the real learning happens.
Question 1
A city receives a federal grant of $500,000 with a stipulation that the funds must be used exclusively for the city's after-school literacy programs for underprivileged youth. The city must also periodically report on how the funds were spent to the granting agency. Which fund should the city use to account for this grant?
This is a classic fund classification question. The key is the restriction on the funds.
A Special Revenue Fund is the correct choice because it is used to account for the proceeds of specific revenue sources that are restricted or committed to expenditure for specified purposes other than debt service or capital projects. The grant is a specific revenue source, and its use is restricted to literacy programs.
- (A) General Fund is incorrect because the grant has a specific, legally enforceable restriction. The General Fund is for resources without such external restrictions.
- (B) Permanent Fund is tempting but wrong. A permanent fund is used when only the earnings from the principal can be spent, not the principal itself. Here, the entire $500,000 grant is meant to be spent.
- (D) Private-Purpose Trust Fund is incorrect because the program benefits the city's residents (a public purpose), even if it's a specific group. Private-purpose trusts are for funds held for individuals, private organizations, or other governments.
Question 2
Which of the following financial statements are prepared using the economic resources measurement focus and the full accrual basis of accounting?
This question tests the fundamental difference in measurement focus and basis of accounting (MFBA). You must know this cold.
The economic resources measurement focus (measuring all assets and liabilities, both current and long-term) and the full accrual basis of accounting (recognizing revenue when earned and expenses when incurred) are used for statements that operate like a business.
This applies to both the government-wide financial statements and the proprietary fund financial statements (Enterprise and Internal Service Funds). Fiduciary funds also use the economic resources/full accrual model, but option (D) is the most complete answer presented, covering the primary government's business-like activities.
- (A) Governmental fund financial statements (General, Special Revenue, etc.) use the current financial resources measurement focus and the modified accrual basis. This is the most common wrong answer.
- (B) Government-wide financial statements only is incomplete. Proprietary funds also use full accrual.
- (C) Fiduciary fund financial statements only is also incomplete. While most fiduciary funds (Pension, Investment, Private-Purpose) use full accrual, this choice omits the government-wide and proprietary funds. The exam requires the best fit among the choices provided.
Question 3
A city council legally adopts its annual budget for the General Fund. The budget includes estimated revenues of $25,000,000 and appropriations (authorized spending) of $24,200,000. Which of the following journal entries correctly records the budget at the beginning of the fiscal year?
Recording the budget is a unique feature of governmental accounting. It's a formal entry that has no parallel in the corporate world. The entry uses control accounts to track the budget throughout the year.
The standard entry is:
- Debit Estimated Revenues: An anticipatory asset. You expect this money to come in.
- Credit Appropriations: An anticipatory liability. It represents the legal authority to spend.
- Credit or Debit Budgetary Fund Balance: This is the plug. If revenues > appropriations (a surplus), you credit Budgetary Fund Balance. If appropriations > revenues (a deficit), you debit it.
In this case, $25,000,000 (revenues) − $24,200,000 (appropriations) = an $800,000 surplus. Therefore, you credit Budgetary Fund Balance for $800,000.
- (C) is the opposite of the correct entry and would be used to record a budgeted deficit.
- (A) and (D) are incorrect because they confuse budgetary accounts with actual operating accounts (like Cash or Revenues). You do not record actual cash or revenue when the budget is adopted.
Question 4
A city's public works department, which is part of the General Fund, issues a purchase order for a new snowplow for $120,000. The city's budget includes an appropriation for this purchase. What is the correct journal entry to record the encumbrance?
This question tests encumbrance accounting, a critical budgetary control mechanism in governmental funds. An encumbrance is a commitment of appropriated funds. It "reserves" part of the appropriation to prevent overspending.
When the purchase order is issued, the city has committed to spending the money. The correct entry is to debit the Encumbrances control account and credit Budgetary Fund Balance - Reserved for Encumbrances. This entry has no effect on the actual fund balance, but it reduces the amount of appropriation available for other purchases.
- (A) is incorrect. This entry is made when the snowplow is actually received and the liability is incurred. At that point, the encumbrance entry is reversed, and the expenditure is recorded.
- (C) is incorrect. This entry records the acquisition of a capital asset and payment, which happens later. Also, in the General Fund (modified accrual), the purchase of a capital asset is recorded as an expenditure, not capitalized as "Equipment."
- (D) is incorrect. Failing to record the encumbrance defeats the purpose of budgetary control. The commitment is made when the PO is issued.
Question 5
A town issues $5 million in general obligation bonds to finance the construction of a new courthouse. How is the receipt of these bond proceeds reported in the Capital Projects Fund versus the government-wide financial statements?
This is a critical distinction that goes to the heart of governmental accounting's dual-perspective reporting. The two sets of statements tell a different story.
| Feature | Capital Projects Fund (Governmental Fund) | Government-Wide Statements |
|---|---|---|
| Basis of Accounting | Modified Accrual | Full Accrual |
| Measurement Focus | Current Financial Resources | Economic Resources |
| Treatment of Bond | Other Financing Source (OFS). It's an inflow of spendable resources, not revenue. | Long-Term Liability. It's a loan that must be repaid. |
| Liability on Balance Sheet | No long-term liability is recorded. | A long-term liability is recorded on the Statement of Net Position. |
Dr. Cash $5M / Cr. Other Financing Sources – Bond Proceeds $5M.
In the Government-wide Statements:
The focus is on the long-term economic view. Issuing bonds is borrowing money. The entry reflects an increase in cash and a new Long-Term Liability.
This difference is a key reconciling item between the two sets of statements. When the bond principal is later repaid from the Debt Service Fund, it is recorded as an Expenditure in that fund.
- (A) is wrong because bond proceeds are never revenue.
- (C) is wrong because governmental fund statements do not record long-term liabilities.
- (D) is wrong because bond proceeds are not revenue in the government-wide statements.
Question 6
Which standard-setting body is responsible for establishing generally accepted accounting principles (GAAP) for U.S. federal government entities?
This is a straightforward but essential recall question. You must know the jurisdiction of each major standard-setting body.
- FASAB sets standards for the federal government and its agencies (e.g., Department of Defense, Social Security Administration).
- GASB sets standards for state and local governments (e.g., State of California, City of Chicago, local school districts).
- FASB sets standards for private-sector companies (e.g., Apple, Ford) and non-governmental not-for-profits.
- GAO is the audit arm of the U.S. Congress and issues auditing standards (the "Yellow Book"), but it does not set accounting principles.
Question 7
A city's General Fund pays $75,000 to the Internal Service Fund for vehicle maintenance services provided to the police department. How should this transaction be reported in the General Fund?
This question tests your knowledge of interfund activity. Because the General Fund is receiving a service (vehicle maintenance) from the Internal Service Fund in a reciprocal exchange that resembles a marketplace transaction, it is recorded as an Expenditure in the paying fund (General Fund) and as a Revenue in the receiving fund (Internal Service Fund).
- (A) Interfund Transfer is incorrect. Transfers are nonreciprocal movements of cash with no expectation of repayment and no exchange of services (e.g., moving money from the General Fund to the Debt Service Fund).
- (C) Interfund Loan is incorrect. A loan involves an expectation of repayment and would be recorded as a receivable in one fund and a payable in the other.
- (D) Reduction of Fund Balance is incorrect; this is an operating transaction, not a direct adjustment to equity.
Question 8
A county government collects property taxes on behalf of several legally separate school districts that operate within its borders. The county has no administrative or direct financial involvement with the school districts' funds. Which fund type should the county use to account for the taxes it holds before disbursing them to the school districts?
This scenario describes a fiduciary relationship. The county is acting as a custodian for assets that belong to other entities (the school districts).
The correct answer is Custodial Fund. This is the designated fund type for reporting fiduciary activities that are not held in a trust. The county is simply holding the assets temporarily for others.
- (A) Agency Fund was the old term for this type of fund prior to GASB Statement No. 84. While the concept is similar, "Custodial Fund" is the current, correct terminology tested on the exam. An answer choice with "Agency Fund" is now a distractor testing if your knowledge is up-to-date.
- (B) Special Revenue Fund is incorrect because the money does not belong to the county and is not a revenue source for its own programs.
- (C) Investment Trust Fund is incorrect. That fund is used to account for the external portion of investment pools held by the sponsoring government.
Calculate Your CGFM Score & Study Hours by Domain
Adjust your practice scores across official CGFM blueprint domains to predict your pass probability and generate a domain-weighted study schedule.
What Does Your Score Mean?
Don't fixate on the raw score. Look for patterns in your misses. A wrong answer on a practice quiz is a gift; it's a map telling you exactly where to focus your precious study time.
- If you missed Questions 1, 7, or 8: Your weakness is in fund classification and interfund activities. This is about knowing the specific purpose of each fund. Your fix is to create a chart detailing the purpose and basis of accounting for each of the 11 fund types and drill flashcards on their definitions.
- If you missed Questions 2 or 5: Your challenge is the dual-perspective reporting model. This is the single biggest conceptual hurdle in CGFM Exam 2. Focus your energy on reconciliation schedules and understanding why a transaction is treated differently under modified accrual vs. full accrual.
- If you missed Questions 3 or 4: Budgetary and encumbrance accounting is your sticking point. These entries are pure memorization and have no private-sector equivalent. Write out the entries to record the budget, record an encumbrance, reverse an encumbrance, and close the budget until it becomes muscle memory.
- If you missed Question 6: This points to a need to clarify the roles of the standard-setting bodies. This is a quick fix. A simple mnemonic or chart can solve this permanently.
Understanding your specific weaknesses is the first step. The next is having an efficient system to fix them. The overall CGFM Pass Rates show this is a challenging exam where targeted preparation is essential.
How to Fix Your Weak Areas and Pass CGFM Exam 2
If these questions exposed some gaps, that's exactly what they were designed to do. Now, you need a systematic way to close those gaps.
The VoraPrep CGFM course is a complete 6-pillar system built for this purpose. It's not just a question bank; it's an entire study framework.
- Complete Lessons & Study Guides: We provide textbook-grade lessons that break down every topic on the AGA blueprint, from fund accounting to federal financial reporting.
- A 1,600+ Question Bank: Our adaptive practice bank has thousands of exam-calibrated questions with detailed rationales for every answer choice.
- Adaptive Learning: The platform identifies the topics you struggle with (like encumbrances or GASB standards) and automatically serves you more questions in those areas until you achieve mastery.
- 1:1 Exam Simulators: Take full-length, timed mock exams that replicate the Prometric testing environment to build your stamina and pacing strategy.
- Spaced-Repetition Flashcards: Our FSRS flashcard system helps you memorize key terms, rules, and concepts for long-term retention.
- Vory, Your 24/7 Personal Tutor: Stuck on a concept at 2 AM? Ask Vory inside any question or lesson for a step-by-step explanation.
Legacy courses charge over $1,500 for passive video lectures. VoraPrep provides a complete, interactive learning system for just $25/month. See how we stack up by reading our VoraPrep vs. AGA for CGFM review.
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