CAM Financial & Budgeting Responsibilities 3 — Questions and Answers
Question 1: A property collects $12,000 in security deposits. How should these funds be treated on the property's financial records?
- Recorded as rental income when collected
- Held as a liability until returned or applied to damages (Correct answer)
- Deposited into the operating account for immediate use
- Reported as owner equity
Correct answer: Held as a liability until returned or applied to damages
Security deposits are liabilities because they belong to the tenant until conditions for return or forfeiture are determined.
Question 2: Which ratio compares a property's net operating income to its market value or purchase price?
- Gross rent multiplier
- Capitalization rate (Correct answer)
- Debt service coverage ratio
- Break-even ratio
Correct answer: Capitalization rate
The capitalization (cap) rate = NOI ÷ Property Value, and is used to assess investment returns and property valuation.
Question 3: When a property manager reconciles the operating account at month-end, which document is compared against the bank statement?
- Rent roll
- General ledger or cash receipts journal (Correct answer)
- Lease abstracts
- Capital improvement schedule
Correct answer: General ledger or cash receipts journal
The general ledger records all financial transactions, which are reconciled against the bank statement to identify discrepancies.
Question 4: An apartment community has a gross potential rent of $1,200,000, a 5% vacancy rate, and operating expenses of $540,000. What is the net operating income (NOI)?
- $660,000 (Correct answer)
- $600,000
- $114,000
- $620,000
Correct answer: $660,000
EGI = $1,200,000 × 0.95 = $1,140,000; NOI = $1,140,000 − $540,000 = $600,000… wait: $1,140,000 − $540,000 = $600,000. The correct answer is $600,000.
Question 5: Which of the following is typically NOT included when calculating net operating income (NOI)?
- Property taxes
- Insurance premiums
- Mortgage principal and interest payments (Correct answer)
- Property management fees
Correct answer: Mortgage principal and interest payments
NOI is calculated before debt service; mortgage payments are excluded to allow for comparison across properties with different financing.
Question 6: A manager is creating next year's budget and uses the current year's actual expenses adjusted for anticipated inflation and known changes. This method is called:
- Zero-based budgeting
- Incremental budgeting (Correct answer)
- Performance-based budgeting
- Capital budgeting
Correct answer: Incremental budgeting
Incremental budgeting starts with the prior period's actuals and adjusts for expected changes, making it the most common approach in property management.
Question 7: What is the purpose of a reserve for replacement fund in apartment management?
- To cover day-to-day operating shortfalls
- To accumulate funds for future major capital repairs or replacements (Correct answer)
- To hold tenant security deposits separately
- To pay quarterly property tax installments
Correct answer: To accumulate funds for future major capital repairs or replacements
Reserve funds set aside money over time so that large future expenses like roof or HVAC replacements don't create sudden financial strain.
CAM Financial & Budgeting Responsibilities 3
A property collects $12,000 in security deposits.
How should these funds be treated on the property's financial records?