CMCA - Certified Manager of Community Associations Budgeting and Reserve Studies Questions and Answers Flashcards

A straight-line depreciation method in a reserve study assumes:

Answer: Components are funded with equal annual contributions over their remaining useful life

The straight-line method spreads the replacement cost evenly over the component's remaining useful life, resulting in equal annual reserve contributions for that component.

Which line item would appear in an operating budget but NOT in a reserve budget?

Answer: Landscaping contracts

Ongoing landscaping contracts are recurring operational expenses paid from the operating budget, not capital replacement items tracked in the reserve budget.

What does it mean when an association's reserve fund is described as 70% funded?

Answer: The reserve fund balance is 70% of what it should be at this point in the components' life cycles

Percent funded refers to the ratio of the current reserve balance to the fully funded balance, which is what the account should theoretically contain given how much each component has depreciated to date.

An association that consistently underfunds its reserves risks which primary consequence?

Answer: Lower property values due to deferred maintenance and potential special assessments

Chronic underfunding leads to deferred maintenance, unexpected special assessments, and declining property values, all of which harm homeowners and the association's financial health.

When preparing an annual budget, a manager should account for inflation primarily by:

Answer: Applying an inflation factor to both operating expenses and reserve component replacement costs

Inflation affects both the cost of operating services and the eventual replacement cost of capital components, so prudent budgeting applies an appropriate inflation factor to both categories.

Which of the following best describes a threshold funding approach in a reserve study?

Answer: Keeping the reserve balance above a minimum floor to avoid reaching zero or going negative

Threshold funding aims to keep the reserve balance above a predetermined minimum rather than targeting full funding, balancing financial security with owner assessment levels.