CMCA Budget, Reserves, Investments and Assessments Pre Test

1. d. Fund reporting method 2. b. Commercial reporting method 3. a. Members' equity 4. c. Baseline funding 5. e. Threshold funding

1. Consists of preparing separate columns for operating, reserve and any special funds. 2. Combines operating and reserve activities in the same column, as opposed to fund reporting, which consists of preparing separate columns for operating, reserve and any special funds. 3. Called the fund balance under the fund method of reporting. It equals the difference between the community association's assets and liabilities. 4. The goal of this funding strategy is to keep the cash reserve balance above zero. 5. This method is based on the baseline-funding concept. The minimum reserve cash balance is set at a predetermined dollar amount. a. Members' equity b. Commercial reporting method c. Baseline funding d. Fund reporting method e. Threshold funding

1. b. Deficit in member's equity 2. a. Surplus

1. If an association's liabilities are greater than it's assets, it has a: 2. If an association's liabilities are less than it's assets, it has a: a. Surplus b. Deficit in member's equity

1. b. FHA (Federal Housing Administration) 2. e. GAAP (Generally Accepted Accounting Principals) 3. d. Fair Debt Collection Practices Act 4. f. FDIC (Federal Deposit Insurance Corporation) 5. a. FHLMC (Federal Home Loan Mortgage Corporation) 6. c. FNMA (Federal National Mortgage Association)

1. Regulates and influences such items as the amount of insurance a community association must carry, procedures for financial operations and requirements for the upkeep of the property. 2. Provide additional information to help the reader understand the community association's financial situation and provide uniformity among reports from different organizations. 3. This requires that the person who owes a debt receive written notice. 4. A government agency that guarantees investors' deposits in member institutions. 5. Buys mortgages from lenders and in doing so requires certain types of insurance to be in place. 6. Federally established secondary mortgage institution that may set requirements that your community association will have to meet if owners are to participate in their financing programs). a. FHLMC b. FHA c. FNMA d. Fair Debt Collection Practices Act e. GAAP f. FDIC

1. e. Notes to financial statements 2. b. Representation letter 3. a. Audit 4. d. Compilation 5. c. Engagement letter

1. The notes accompany the CPA-prepared financial statements. These footnotes provide additional information to help the reader understand the community association's financial situation. 2. A letter from the CPA that states that the information the community association provides is true to the best of its knowledge. 3. An examination of the accounting records and procedures of an organization by a CPA for the purpose of verifying the accuracy and completeness of financial records. 4. A presentation of financial statements by a CPA without the assurance that the information conforms to GAAP. 5. When your community hires a CPA, he or she will send a letter that describes the nature of the work to be done, type of report to be prepared, fee for services and time frame for the assignment. a. Audit b. Representation letter c. Engagement letter d. Compilation e. Notes to financial statements

1. f. Statement of income and expense 2. a. Statement of cash flows 3. c. Balance Sheet 4. d. Chart of Accounts 5. b. Reconciliation of expenses and revenue 6. e. Reserve cash flow statement

1. This report records the community association's financial transactions during a given period of time - generally for a given month plus the fiscal year to date. It is away to keep track of the community's financial activity. 2. This is a summary of the flow of funds into and out of the community association prepared for normal operations, investment activities, and any borrowing activities. 3. Is a summary of a community's financial position at a specific point of time. 4. An organized list of titles, descriptions, and assigned numbers of all accounts in an organization's general ledger. The assigned number helps you locate the account. The title describes the purpose of the account. 5. After you draft both your operating and replacement fund budgets for the coming year, you must reconcile your estimated expenses with your community's anticipated revenue. To reconcile means to bring together after a difference. 6. Shows the amount to be funded and the amount to be expended from the replacement fund over a given period of time. a. Statement of cash flows b. Reconciliation of expenses and revenue c. Balance Sheet d. Chart of Accounts e. Reserve cash flow statement f. Statement of income and expense

b. net loss

A ___________ occurs when expenses are greater than income. a. net income b. net loss c. net gain d. net profit

c. lien

A _________________ is a legal claim by one party (community association) on the property of another (delinquent owner) to obtain the payment of a debt or the satisfaction of an obligation. a. foreclosure b. personal money judgement c. lien d. bad debt write-off

a. Personal money judgement

A decision by a judge to allow the community association to claim the owner's personal property to settle a delinquent account. a. Personal money judgement b. Acceleration c. Bad debt write off d. Foreclosure

a. compilation

A(n) ____________________ is a presentation of financial statements by a CPA without the assurance that the information confirms to GAAP. a. compilation b. review c. audit d. opinion letter

b. Prohibit the referral of delinquent assessments to legal counsel.

An effective collection policy should exhibit each of the following EXCEPT: a. Be established by the proper formal resolution of the board. b. Prohibit the referral of delinquent assessments to legal counsel. c. Set a firm due date for assessments. d. Allow for discretion in special cases.

b. A budget surplus

Because a community association relies on the timely collection of assessments in order to meet operating expense requirements, delinquent payments may results in each of the following EXCEPT: A. Property beginning to appear run-down b. A budget surplus c. Disharmony between paying owners and delinquent ones d. Essential maintenance becoming unaffordable

c. Under Federal tax code, all organizations are taxable on their income unless specifically exempted. While managers do not necessarily have to know all aspects of what information must be entered on a tax return (preparation of tax returns must remain the responsibility of those persons most familiar with the tax code) a manager must know, in order to provide guidance to association boards of directors, that associations must file tax returns and may have a tax obligation.

Community association managers must be familiar with Federal income tax requirements and options because: a. The IRS will intermittently interview the manager concerning tax filing status. b. States require managers to be knowledgeable in this area of community association finance. c. Under Federal tax code, all organizations are taxable on their income unless specifically exempted. d. The account will require will input from the community association when the tax return is prepared.

a. Assessments penalize residents for violating association rules.

Each of the following statements regarding community association assessments are true EXCEPT: a. Assessments penalize residents for violating association rules. b. An assessment is the owner's financial obligation to the community association during a given period of time. c. An assessment for an owner's share of the common expenses is a binding legal obligation based on the community association's governing documents. d. An annual assessment may be paid on a monthly, quarterly, or annual basis.

d. All of the above

From what sources do associations get authority to collect assessments? a. Federal laws and regulations b. State statues c. Governing documents d. All of the above

c. Generally Accepted Accounting Principals

GAAP stands for: a. Generally Allowed Accounting Principals b. Generally Accepted Association Principals c. Generally Accepted Accounting Principals

1. b. zero-base budgeting 2. a. historical trend budgeting

IDENITFY THE EXPENSE CALCULATION METHODS 1. All line items are set to zero and the amount of funds allotted to each must be justified. 2. This method begins with the assumption that existing line items are needed. The amount of funds allotted to each during the current year is adjust for expected changes in the coming year. a. historical trend budgeting b. zero-base budgeting

1. b. Cash Basis 2. c. Accrual Basis 3. a. Modified

IDENTIFY THE ACCOUNT METHODS USED FOR REPORTS 1. Revenue recorded when RECEIVED, Expenses recorded when PAID. 2. Revenue recorded when EARNED, Expenses recorded when INCURRED. 3. Revenue recorded when EARNED, Expenses recorded when PAID. a. Modified b. Cash Basis c. Accrual Basis

a. equal method computation

IDENTIFY THE FORMULA BELOW USED FOR CALCULATING ASSESSMENTS (Total Assessments Required in Annual Budget / Number of Units) / Number of Installment Payments in a Year a. equal method computation b. percentage method

1. a. discretionary line items 2. d. mandatory line items

IDENTIFY THE TWO TYPES OF EXPENDITURES IN A BUDGET 1. Items based on owner, board, and committee desires. They are items people would like to have. They can also be voted out of the budget. 2. Items based on community and owner needs and requirements that the community is obligated to meet. a. discretionary line items b. reserve study c. assessment d. mandatory line items

1. b. percentage method 2. a. equal method computation

IDENTIFY THE TWO WAYS TO CALCULATE ASSESSMENTS 1. Uses the assigned percentage to determine each own'er prorata share. 2. Assesses each owner equally for each lot or unit. a. equal method computation b. percentage method

d. Statement of Income and Expenses and Budget The is report shows the activity over a period of time and therefore will indicate the amount of income received and expenses incurred, whether actual ora cried, for all activity of the association through the last day of the month or other reporting period. The report may also show the amount of money in each budgeted line item for the entire year and amount remaining in each line item for the last 4 months of the year; the budget is an estimate of revenue and expenses for a given period, usually a year, but does not show actual figures. A comparison of the 2 against one another, be depicted on the same report, permits the reader to see the difference between actual and budgeted figures.

If you want to know the difference between actual and budget figures for a revenue account, to which documents should you refer? a. Balance sheet and Budget b. Statement of Cash Flow and Budget c. Statement of Profit and Loss d. Statement of Income and Expenses and Budget

1. d. Assets 2. c. Liabilities 3. b. Members' equity of fund balance

MATCH THE COMPONENTS OF A BALANCE SHEET 1. Anything owned that has value. 2. What is owed to others or collected in advance. 3. The different between the community's assets and liabilities. a. Revenue b. Members' equity of fund balance c. Liabilities d. Assets

1. c. Underfunding 2. a. Overfunding 3. b. Board member liability

MATCH THE CONSEQUENCES OF NOT HAVING A RESERVE STUDY 1. This may result in special assessments, bank loans, deferred maintenance, or a combination of these. 2. This can result in current owners paying too much (more than owners "fair share"), for the benefit of future owners. 3. This can expose them to claims of fiscal irresponsibility and loss of Directors & Officers insurance coverage. a. Overfunding b. Board member liability c. Underfunding

1. c. Operating expenses 2. a. Major improvement expenses 3. b. Reserve account

MATCH THE DIFFERENT TYPES OF EXPENSES 1. For the normal and usual repairs for the association. 2. Items added to improve the quality of life, appearance of the property, or enhance property values. 3. Used to pay for long-term repair and maintenance issues. a. Major improvement expenses b. Reserve account c. Operating expenses

1. b. Safety 2. c. Liquidity 3. a. Yield

MATCH THE INVESTMENT OBJECTIVES 1. Protecting the principal (amount of original investment) from loss. 2. The ease with which an investment can be converted into cash or a cash equivalent. 3. The amount of return on an investment. a. Yield b. Safety c. Liquidity

1. b. Revenue 2. c. Expenses 3. a. Net revenue - Also known as excess left over after deducting expenses

MATCH THE STATEMENT OF REVENUE AND EXPENSE COMPONENTS 1. Represents the earnings of the community association. 2. Are the cost of goods and services used to operate and maintain the community's property. 3. Is the amount left over after deducting expenses from income. a. Net revenue b. Revenue c. Expenses d. Liabilities

1. c. Chapter 7 2. a. Chapter 11 3. b. Chapter 13

MATCH THE TYPES OF BANKRUPTCY 1. Called straight bankruptcy or liquidation. It involves the prompt conversion of all the individual's non-exempt property to cash, and payment of creditors to the extent possible. 2. This is called a reorganization because it is designed to allow for an orderly payment to creditors that enable a corporation to continue. 3. This is used to reorganize personal or non-corporate debt. A plan is submitted to a judge for paying off all or nearly all of the debt over a specified period of time. a. Chapter 11 b. Chapter 13 c. Chapter 7

1. c. Assessment 2. a. Total annual assessment 3. b. Special assessment

MATCH THE TYPES OF REVENUE 1. The owner's financial obligation to the community association during a given period of time. It covers the owner's share of the common expense. 2. Amount of income that the board decides to obtain from owner assessments. 3. A one-time assessment often voted on by the owners to cover a major expense that was not included in the annual budget or replacement reserve. a. Total annual assessment b. Special assessment c. Assessment

1. b. Audit 2. a. Review 3. c. Compilation

MATCH: There are three types of reports that a CPA typically provides: 1. An examination of the accounting records and procedures of an organization for the purpose of verifying the accuracy and completeness of financial records. 2. A less thorough, and therefore less costly, review of a community association's financial activities. 3. A presentation of financial statements by a CPA without the assurance that the information conforms to GAAP. a. Review b. Audit c. Compilation

a. Cash basis - Income is recorded/recognized when received and expenses are recorded/recognized when they are actually paid.

On what basis is the community association reporting its finances when the financial reports indicate income when received and expenses when paid out? a. Cash basis b. Modified accrual basis c. Accrued basis d. Modified cash basis

FALSE This describes an engagement letter.

TRUE OR FALSE A CPA's representation letter describes the nature of the work to be done, the type of report to be prepared, the fee for services, the time frame for the assignment, and the accountant's disclaimers.

FALSE Yearly

TRUE OR FALSE Acceleration is the collection of all assessments due on a monthly basis.

FALSE Dual signatures for all withdrawals should be required.

TRUE OR FALSE An asset protection measure includes only requiring one signature for all withdrawals.

FALSE 3% or less of the annual assessments for delinquent rate is excellent.

TRUE OR FALSE An association with 3% or less delinquent rate has a Poor to Average position.

TRUE

TRUE OR FALSE An established collection policy educates owners about their obligations to the community association and the consequences of not meeting those obligations on time.

TRUE

TRUE OR FALSE An example of a discretionary line item in the annual budget is the purchase of a snow melter.

TRUE

TRUE OR FALSE An example of a mandatory line item in the annual budget are utility costs.

TRUE

TRUE OR FALSE Assessments (sometimes called maintenance fees) are the owners' financial obligations to a community association during a given period of time. They cover the owners' share of the common expenses.

TRUE

TRUE OR FALSE Community association managers must be familiar with federal income tax requirements and options to determine tax status and reduce tax obligation.

TRUE

TRUE OR FALSE Community associations must file a federal income tax return every year.

TRUE

TRUE OR FALSE Other revenue sources may include rent from commercial tenants, charges of resale packages, collection on insurance claims or legal settlements, ad space in the community newsletter.

FALSE

TRUE OR FALSE Requiring a single signature to withdraw funds from an investment account is a good example of a system of internal checks and balances to protect association investments.

TRUE

TRUE OR FALSE The association still has the right to collect any new charges a lot incurs after the owner files bankruptcy, although only an attorney can continue the collection efforts.

TRUE It shows: What your association owns What your association owes The "net worth" of the association

TRUE OR FALSE The balance sheet is a summary, or snapshot, of the financial condition of the association at a specific point in time.

FALSE It combines operating and reserve activities in the same column.

TRUE OR FALSE The commercial reporting method consists of preparing separate columns for operating, reserve, and any special funds.

FALSE Associations should regularly engage an independent CPA to conduct an audit.

TRUE OR FALSE The manager is responsible for conducting the annual audit of an association.

TRUE

TRUE OR FALSE The value of a reserve study can reduce personal liability from claims of financial mismanagement.

TRUE

TRUE OR FALSE When a community association determines that a debit cannot be collected from an owner after a reasonable effort has been made, it must take a bad debt write-off.

FALSE If there are other debts that take precedent over the association's claim, they get paid off first. If there is not enough money to pay off all the debts, the association may not get what is owed to them.

TRUE OR FALSE When a community association forecloses on a unit and it is auctioned off, the association will always get the money it is owed.

FALSE Legal counsel should be notified as soon as you become aware of a bankruptcy filing by a owner. All bankruptcy notices should be forwarded to legal. Stop all collection efforts immediately.

TRUE OR FALSE When the association is notified of a bankruptcy, they should continue their collection efforts against the property.

b. Special assessment

The Club spent over $400,000 in snow removal this year. They only budgeted $50,000. What type of assessment will the board of directors levy? a. Total annual assessment b. Special assessment c. Assessment

b. More accurately reflects the association's financial condition. Under the modified accrual basis, also sometimes referred to as modified cash basis, some accounts, such as assessment income, are maintained on the accrual basis and other accounts, such as interest or other miscellaneous income accounts, and some expenses, such as miscellaneous repairs, are maintained on a cash basis. The accrual of major expenses in particular, such as a contract for landscaping, trash remove, etc., regardless of non-receipt of invoices, give the reader a much more accurate depiction of the association's financial standing, as the accruals serve to alert the reader to the recognition of obligations that the association must meet.

The best reasoning for recommending the modified accrual accounting method is that, compare to cash accounting, it: a. Will make future audit work accurate. b. More accurately reflects the association's financial condition. c. Is more easily understood by board members. d. Can be accomplished more quickly.

b. Acceleration

The collection of all assessments due through the end of the fiscal year. For example, if an owner's payments on the annual assessment are due monthly and become delinquent at the end of March, all monthly payments through December of that year are due immediately. a. Personal money judgement b. Acceleration c. Bad debt write off d. Foreclosure

c. Statement of income and expenses, account balance, and a balance sheet. INCORRECT: a. Statement of changes in member's equity, cash flow analysis, and notes to financial statements. - This information is typically included as part of a year-end report prepared by an independent CPA, not the interim reports typically prepared by management or association accounting staff. b. State of reserve funding, investment results, and accounts receivable. - All of this information is typically contained on the balance sheet, which is one of the reports included with the interim financial reports. These items can be but are not necessarily separate reports. d. State of cash flow, balance, and bank statements. - The statement of cash flows is typically included as part of a year-end report prepared by an independent CPA; bank statements are typically (and should be) included with the interim reports typically prepared by management or association accounting staff.

The interim financial report should, at a minimum, include a: a. Statement of changes in member's equity, cash flow analysis, and notes to financial statements. b. State of reserve funding, investment results, and accounts receivable. c. Statement of income and expenses, account balance, and a balance sheet. d. State of cash flow, balance, and bank statements.

c. Bad debt write off

This consists of recording an uncollectible debt as an expense that the association must absorb. This usually requires a resolution by the board. a. Personal money judgement b. Acceleration c. Bad debt write off d. Foreclosure

d. Foreclosure

This is a legal proceeding filed in court whereby a party with a claim against an owner can claim ownership of the unit involved in order to recover the money it is owed. The unit is usually auctioned by the court and sold to the highest bidder. a. Personal money judgement b. Acceleration c. Bad debt write off d. Foreclosure

b. Balance sheet and statement of revenue and expense. The balance sheet shows the amount of money on hand in all association accounts as well as that allocated to reserves at a given point int time; the statement of revenue and expenses shows the activity in all budgeted line items over a period of time. Together these reports can be used to determine expenses to date and funds available for the future. INCORRECT: a. Statement of cash flows and accounts receivable report - This reconciles an association's operating, investing and financing activities from the basis of accounting used (generally accrual) to a cash basis to reflect what caused the changes in the cash balance during the year; the accounts receivable reports shows the amount of money owners and others owe to the association. c. Statement of cash flows and check register - This reconciles an association's operating, investing and financing activities from the basis of accounting used (generally accrual) to a cash basis to reflect what caused the changes in the cash balance during the year; the accounts receivable reports shows the amount of money owners and others owe to the association. d. d. Replacement reserve report and general ledger - The replacement reserve report would show the flow of funds into and out of funds set aside for the future repair or replacement of major (capital) components for which the association is responsible; the general ledger depicts detailed activity within all accounts used by the association, i.e. accrual (and reversal thereof) of income or expense items and, on the expend side, the entitles (individuals, service providers, vendors) billing the association and receiving payment.

What are the two essential financial documents the board of directors should use to determine the amount of funds available for an unbudgeted expenses? a. Statement of cash flows and accounts receivable report. b. Balance sheet and statement of revenue and expense. c. Statement of cash flows and check register. d. Replacement reserve report and general ledger.

b. revenue

What is the collective items or amounts of income which are appropriated for common expenses? a. expenses b. revenue c. assessment d. zero-based budgeting

a. To note problem areas in an association's financial operations and recommend modifications and improvements. Discusses an association's accounting systems and controls and any weakness found in them as well as other comments on an association's finances. INCORRECT: b. The engagement letter is a contract between the independent CPA and the association describing among other things the nature of the work to be performed, timing of the work, fees, etc. c. The nature and scope of the work to be performed is out lined in the Engagement Letter. d. Any cover letter that accompanies an audit report distributed to the membership should be produced by the board with assistance from the management company or association personnel as appropriate.

What is the purpose of a Management Letter? a. To note problem areas in an association's financial operations and recommend modifications and improvements. b. To serve as an audit engagement letter after selection of the auditor by the board. c. To outline the nature and scope of a proposed audit. d. To serve as a cover letter to an audit report distributed to association members.

c. The financial position of the association. The budget should be set to meet operation needs. INCORRECT: Need to fund a budget in accordance with needs. Tenants are not members of association. The property must be maintained regardless of age health of owners.

When the Board reviews the proposed budget for approval, what should it consider? a. The financial effect on the owners. b. The economic impact on tenants. c. The financial position of the association. d. The physical condition of the association members.

c. Declaration

When using the Percentage method to calculate assessments, where will you find the "Percentage Interest"? a. Bylaws b. State statues c. Declaration d. Board resolution

c. Late charges or other penalties d. Suspending voting rights e. Suspending rights to use the amenities

Which collection remedies are the most affordable for an association? a. Foreclosing upon the lien b. Suing the owner c. Late charges or other penalties d. Suspending voting rights e. Suspending rights to use the amenities f. Perfection a lien on the home or unit

d. Suspending voting rights

Which collection remedy is least effective? a. Foreclosing upon the lien b. Suing the owner c. Late charges or other penalties d. Suspending voting rights e. Suspending rights to use the amenities f. Perfection a lien on the home or unit

c. Late charges or other penalties

Which collection remedy is the most effective? a. Foreclosing upon the lien b. Suing the owner c. Late charges or other penalties d. Suspending voting rights e. Suspending rights to use the amenities f. Perfection a lien on the home or unit

a. cash basis

Which of the following accounting methods records income when it is collected and expenses when they are paid? a. cash basis b. accrual basis c. modified cash basis d. modified accrual basis

b. liquidity

Which of the following investment objectives for community associations refers to the ease with which an investment can be converted into cash or a cash equivalent? a. safety b. liquidity c. yield d. treasury bills

b. state of changes in members' equity

Which of the following is a year-end financial statement that reconciles the beginning and ending members' equity with results of operators for the period? a. balance sheet b. state of changes in members' equity c. statement of cash flows d. notes to financial statements

d. Foreclosing on an owner. Extra-judicial allows Boards to do the other things outside of the courts. Foreclosing must be done with a court.

Which of the following is not an extra-judicial procedure for encouraging an owner to pay off a delinquent account? a. Removing the owner's assigned parking space. b. Collecting the rent from a delinquent owner's tenant. c. Imposing a late charge on delinquent accounts. d. Foreclosing on an owner.

c. Expenses

Which of the following is not one of the three major components of a balance sheet? a. Assets b. Liabilities c. Expenses d. Members' Equity

b. Chapter 11

Which of the following types of bankruptcy is called a reorganization because it is designed to allow for an orderly payment to creditors that enables a corporation to continue? a. Chapter 7 b. Chapter 11 c. Chapter 13 d. Chapter 21

c. Property violations

Which one below is not a component of Financial Statements: a. Statement of revenue and expense b. Balance sheet c. Property violations d. Bank statements, aged receivables, and open payables

f. All of the above

Which one of the following is a reason for maintaining a Reserve Account? a. Meets legal, fiduciary, and professional requirements. b. Provides for the planned replacement of major items. c. A reserve account equalizes the contributions of old and new owners. d. Minimizes the need for special assessments. e. Enhances resale values. f. All of the above

c. board treasurer

Who is responsible for putting together the budget each year? a. manager b. board president c. board treasurer d. finance committee

a. Statement of revenue and expense. - This report shows the activity over a period of time and therefore will indicate the amount of income received and expenses incurred, whether actual or accrued, for all activity of the association during the 8 months of the fiscal year. The report may also show the amount of money in each budgeted line item for the entire year and amount remaining in each line item for the last 4 months or the year. INCORRECT: b. Balance sheet - Show the association's financial position at a point in time, in this case the last day of the 8th month. It shows how much cash is in hand. It does not indicate the amount of funds budgeted for particular line items or income and expenses and therefore has very limited use, if any at all, in projecting year end expenses. c. Statement of cash flows - This reconciles an association's operating, investing and financing activities from the basis of accounting used (generally accrual) to a cash basis to reflect what caused the changes in the cash balance during the year and does not indicate the amount of funds budgeted for particular line items of income and expense. Therefore this report has very limited us, if any at all, in projecting year end expenses. d. Accounts payable repo - This report shows how much money is owed to service providers, vendors and others at a given point in time and does not indicate the amount of funds budgeted for particular line items of income and expenses. Therefore this report has very limited us, if any at all, in projecting year end expenses.

Your association just completed the eighth month of its fiscal year. Which financial report would be most useful to project year end expenses? a. Statement of revenue and expense. b. Balance sheet c. Statement of cash flows d. Accounts payable repo