AGA GFMC Exam Dumps

What Is the Current Ratio?

The current ratio measures an entity's ability to cover its short-term liabilities with its short-term assets. The formula is: CurrentRatio=TotalCurrentAssetsTotalCurrentLiabilities\text{Current Ratio} = \frac{\text{Total Current Assets}}{\text{Total Current Liabilities}}CurrentRatio=TotalCurrentLiabilitiesTotalCurrentAssets

Calculation:

Total Current Assets = $1,320

Total Current Liabilities = $810

CurrentRatio=1,320810\text{Current Ratio} = \frac{1,320}{810}CurrentRatio=8101,320 CurrentRatio1.63\text{Current Ratio} 1.63CurrentRatio1.63

Why the Current Ratio Matters:

A current ratio above 1 indicates that the entity has more current assets than current liabilities, suggesting good short-term liquidity.

Why Other Options Are Incorrect:

A . 0.61, B. 0.98, C. 1.14: These values result from incorrect calculations or misinterpretations of the formula.

Reference and Documents:

GAO Financial Analysis Guide: Provides guidance on using the current ratio to assess liquidity.

GASB Financial Reporting Requirements: Highlights the importance of liquidity measures in government financial statements.

What Is an Internal Control Deficiency?

An internal control deficiency occurs when an organization fails to implement controls to prevent or detect risks effectively.

In this case, responding only to maintenance needs when complaints are received demonstrates a lack of proactive controls, increasing the risk of issues going unnoticed or escalating over time.

Why Is Option C Correct?

Proactive maintenance schedules and inspections are essential for ensuring the safety and functionality of critical infrastructure like dams. Relying solely on complaints or employee reports is a reactive approach and represents a deficiency in internal controls.

Why Other Options Are Incorrect:

A . Inspecting completed work: This is a proper control to ensure compliance with contract specifications.

B . Releasing the bond after work completion: This ensures contractual obligations are met and is a good control practice.

D . Checking bidder references: This is part of the procurement process and a valid internal control.

Reference and Documents:

GAO Standards for Internal Control (Green Book): Emphasizes proactive controls and monitoring for critical operations.

Federal Infrastructure Maintenance Best Practices: Highlights proactive inspections and maintenance as essential controls.

Minimum Components of a Government Financial System:

A general ledger is the foundation of any financial system, providing a complete record of all financial transactions.

The definition of general ledger accounts ensures proper classification, tracking, and reporting of financial activities.

Explanation of Answer Choices:

A . Automated transaction processing: Incorrect. While automation is beneficial, it is not a 'minimum' requirement. Manual systems can still exist.

B . Debt-reduction analysis: Incorrect. This is a financial management activity, not a core component of the financial system.

C . Performance management reporting: Incorrect. Performance reporting is separate from the foundational financial system.

D . General ledger account definition: Correct. This is a fundamental element of any government financial system.

GAO, Standards for Internal Control in the Federal Government (Green Book).

GASB, Codification of Governmental Accounting and Financial Reporting Standards.

What Are Liquidity Ratios? Liquidity ratios are financial metrics used to measure an organization's ability to meet its short-term financial obligations as they come due. These ratios assess whether the organization has sufficient liquid assets (like cash, receivables, or short-term investments) to cover its current liabilities (debts or obligations due within a year).

Why Are They Relevant to Creditors? Creditors care deeply about an entity's ability to repay its debts in a timely manner. Liquidity ratios provide a snapshot of the organization's financial health and give insight into its capacity to meet short-term demands. They are essential tools in evaluating whether a government entity (federal, state, or local) or any other organization can pay its creditors without needing to secure additional financing or liquidate long-term assets.

Common Liquidity Ratios: The most commonly used liquidity ratios are:

Current Ratio: This measures the organization's ability to pay off its current liabilities with current assets. Formula: Current Assets Current Liabilities

Quick Ratio (Acid-Test Ratio): A stricter version of the current ratio, it excludes less liquid assets (like inventory) to assess the organization's immediate ability to pay short-term debts. Formula: (Current Assets - Inventory) Current Liabilities

Cash Ratio: Focuses only on the most liquid assets, such as cash and cash equivalents. Formula: Cash + Cash Equivalents Current Liabilities

How Do Liquidity Ratios Apply to Governmental Accounting? In governmental accounting, liquidity ratios are crucial for determining whether a governmental entity has the financial flexibility to manage short-term obligations like accounts payable, payroll, and other operating costs. For example:

State and local governments use liquidity ratios to show stakeholders their ability to sustain operations without financial strain.

Government-wide financial statements (under GASB standards) often emphasize liquidity to demonstrate fiscal health to bondholders and credit rating agencies.

Why Not Other Ratios?

A . Budgetary Cushion Ratios: These focus on the organization's ability to withstand revenue shortfalls and maintain budgetary reserves, not specifically on meeting creditor demands.

C . Debt Burden Ratios: These measure the overall burden of debt on the organization but don't directly address short-term liquidity or solvency.

D . Turnover Ratios: These evaluate operational efficiency (e.g., how quickly assets like inventory are converted into revenue), which doesn't directly relate to creditor demands.

Reference and Documents:

Government Financial Manager (GFM) Competency Framework by the Association of Government Accountants (AGA): Section on ''Financial Analysis'' emphasizes the importance of liquidity ratios in assessing short-term solvency for government entities.

GASB Concepts Statement No. 1: Discusses the need for governmental financial reporting to provide information on financial condition, including short-term liquidity.

AGA Performance Management Framework Guide (2023): Highlights liquidity ratios as critical tools for demonstrating fiscal responsibility and transparency in public sector financial management.

Deterrence of Fraud:

A primary deterrent to fraud is the fear of being caught. When individuals believe there is a high likelihood of detection, they are less likely to commit fraudulent acts.

Strong internal controls, monitoring, and audits increase this fear and serve as effective deterrents.

Explanation of Answer Choices:

A . Delegation of responsibility without oversight: Incorrect. Lack of oversight increases the risk of fraud rather than deterring it.

B . The fear of detection: Correct. The fear of being caught is one of the most effective fraud deterrents.

C . Job satisfaction and sense of 'team': While these contribute to a positive work environment, they do not directly deter fraud.

D . Performance of employee background checks: Background checks are a preventive measure but are less effective as a fraud deterrent compared to detection risk.

Association of Certified Fraud Examiners (ACFE), Fraud Prevention Guidance.

GAO, Fraud Risk Management Framework.