CCS Financial Operations & Budgeting 2 — Questions and Answers
Question 1: What is the primary purpose of a condominium association's reserve fund?
- To cover unexpected legal costs
- To fund future major repairs and replacements of common elements (Correct answer)
- To supplement the operating budget shortfalls
- To pay board member compensation
Correct answer: To fund future major repairs and replacements of common elements
Reserve funds are specifically designated to cover future major repairs and replacements of common elements such as roofs, elevators, and pavement.
Question 2: A condominium association collects $500,000 in annual assessments but spends $480,000 on operating expenses. The $20,000 surplus should be:
- Returned to unit owners as a rebate
- Transferred to the reserve fund (Correct answer)
- Retained in the operating account for contingencies
- Distributed among board members
Correct answer: Transferred to the reserve fund
Best practice and many state statutes require surplus operating funds to be transferred to the reserve fund to build capital reserves.
Question 3: Which financial statement shows a condominium association's assets, liabilities, and equity at a specific point in time?
- Income statement
- Cash flow statement
- Balance sheet (Correct answer)
- Budget variance report
Correct answer: Balance sheet
The balance sheet (also called statement of financial position) presents assets, liabilities, and equity as of a specific date.
Question 4: A 'percent funded' reserve study result of 30% indicates that the association:
- Has fully funded its reserves for 30 years
- Has only 30% of the ideal reserve balance on hand (Correct answer)
- Spends 30% of its budget on reserves
- Has 30% more in reserves than needed
Correct answer: Has only 30% of the ideal reserve balance on hand
Percent funded measures the ratio of actual reserve balance to the fully funded target; 30% means the association is significantly underfunded.
Question 5: When an association borrows money to fund a major capital project, the loan repayment should be tracked in the:
- Operating budget only
- Reserve fund only
- Both operating and reserve budgets appropriately (Correct answer)
- Neither budget; it is off-balance-sheet
Correct answer: Both operating and reserve budgets appropriately
Loan principal repayments typically appear in the reserve fund while interest expense may be reflected in the operating budget, depending on the association's accounting policy.
Question 6: Which method of accounting recognizes revenue when assessments are due, regardless of when cash is received?
- Cash basis accounting
- Accrual basis accounting (Correct answer)
- Modified cash basis accounting
- Fund accounting
Correct answer: Accrual basis accounting
Accrual basis accounting records revenues and expenses when they are earned or incurred, not when cash changes hands.
Question 7: A special assessment is most appropriately levied when:
- The board wants to increase reserve balances above the fully funded target
- Reserve funds are insufficient to cover an unexpected major repair (Correct answer)
- The operating budget shows a small surplus at year end
- Unit owners vote to reduce monthly assessments
Correct answer: Reserve funds are insufficient to cover an unexpected major repair
Special assessments are typically used when reserves are inadequate to cover a necessary major repair or capital project that cannot wait.
CCS Financial Operations & Budgeting 2
What is the primary purpose of a condominium association's reserve fund?