CED Financial Management & Oversight 2 — Questions and Answers
Question 1: A nonprofit's board treasurer notices that actual program expenses are 25% over budget midyear. What is the MOST appropriate immediate action?
- Freeze all discretionary spending immediately
- Request a variance analysis from the CFO and convene a finance committee review (Correct answer)
- Transfer funds from the reserve account to cover the overage
- Wait until year-end to assess whether the variance corrects itself
Correct answer: Request a variance analysis from the CFO and convene a finance committee review
A variance analysis identifies the cause of the overage and informs corrective action before the finance committee decides next steps.
Question 2: Which financial ratio best measures an organization's ability to meet short-term obligations without selling long-term assets?
- Debt-to-equity ratio
- Current ratio (Correct answer)
- Return on assets
- Operating margin
Correct answer: Current ratio
The current ratio (current assets ÷ current liabilities) measures short-term liquidity without relying on long-term asset sales.
Question 3: An executive director receives a restricted grant for a specific program. Which practice ensures proper stewardship of those funds?
- Deposit the grant into the general operating account for convenience
- Track the grant in a separate fund code and report expenditures to the funder per grant terms (Correct answer)
- Use the grant for overhead if program costs come in under budget
- Transfer excess restricted funds to unrestricted reserves at fiscal year-end
Correct answer: Track the grant in a separate fund code and report expenditures to the funder per grant terms
Restricted funds must be tracked separately and spent according to funder stipulations, with reporting demonstrating compliance.
Question 4: What is the primary purpose of an audit committee in a nonprofit organization?
- To conduct day-to-day financial transactions on behalf of the board
- To oversee the integrity of financial reporting, internal controls, and the external audit process (Correct answer)
- To approve the annual operating budget before it goes to the full board
- To manage the organization's investment portfolio
Correct answer: To oversee the integrity of financial reporting, internal controls, and the external audit process
The audit committee provides independent oversight of financial reporting integrity and the relationship with external auditors.
Question 5: A Certified Executive Director is reviewing the statement of cash flows. Which section reveals whether the organization can sustain operations from its core mission activities?
- Financing activities
- Investing activities
- Operating activities (Correct answer)
- Capital expenditures schedule
Correct answer: Operating activities
Operating activities show cash generated or used by the organization's primary mission-related programs and administrative functions.
Question 6: Which internal control is MOST effective at preventing check fraud in a small nonprofit?
- Requiring dual signatures on checks above a defined threshold (Correct answer)
- Having the executive director sign all checks personally
- Reconciling bank statements quarterly rather than monthly
- Storing blank checks in a locked file cabinet accessible only to the bookkeeper
Correct answer: Requiring dual signatures on checks above a defined threshold
Dual signatures create a two-person authorization requirement that deters and detects fraudulent disbursements.
Question 7: When preparing a multi-year capital campaign budget, which cost is most commonly underestimated by executive directors?
- Donor recognition expenses
- Feasibility study fees
- Campaign staff salaries and benefits over the full campaign duration (Correct answer)
- Printing and direct mail costs
Correct answer: Campaign staff salaries and benefits over the full campaign duration
Multi-year staff costs, including benefits and potential salary increases, often constitute the largest and most underestimated component of capital campaign expenses.
CED Financial Management & Oversight 2
A nonprofit's board treasurer notices that actual program expenses are 25% over budget midyear.
What is the MOST appropriate immediate action?