CED Financial Management & Oversight 4

Question 1

An executive director is evaluating whether to lease or purchase office equipment. Which financial concept is MOST relevant to this decision?

Accepted Answer

Net present value (NPV) analysis

Answer

NPV analysis compares the present value of lease payments against purchase costs, accounting for time value of money to identify the financially superior option.

Question 2

A nonprofit board approves an endowment spending policy allowing annual distributions of 5% of the endowment's 12-quarter rolling average market value. What is the PRIMARY purpose of using a rolling average?

Accepted Answer

To smooth out market volatility and provide predictable annual income

Answer

A rolling average dampens the effect of short-term market swings, giving programs more predictable budgets regardless of year-to-year market fluctuations.

Question 3

Which of the following BEST describes the difference between a capital budget and an operating budget?

Accepted Answer

The capital budget covers multi-year asset investments while the operating budget covers recurring annual income and expenses

Answer

Capital budgets plan for long-term asset acquisitions or improvements, while operating budgets manage day-to-day revenue and expense cycles.

Question 4

A state contract requires a nonprofit to submit a cost allocation plan. What does this plan demonstrate?

Accepted Answer

How shared costs are distributed equitably across programs and funding sources

Answer

A cost allocation plan shows funders and auditors how indirect or shared costs (rent, utilities, administration) are fairly distributed among programs.

Question 5

An executive director reviews a cash flow projection showing a negative cash position in months 3 and 4. What is the BEST proactive strategy?

Accepted Answer

Negotiate a line of credit before the shortfall occurs

Answer

Securing a line of credit while the organization is financially stable is far less expensive and more reliable than scrambling for funds during a crisis.

(CED) Certified Executive Director Practice Test

(CED) Certified Executive Director Practice Test

CED Financial Management & Oversight 4