Financial Reporting and Controls Flashcards

What does 'percent funded' measure in the context of reserve funding?

Answer: The ratio of actual reserve balance to the fully funded ideal

Percent funded is the ratio of the current reserve balance to what it should ideally be (fully funded benchmark) expressed as a percentage.

Which of the following is considered a capital expenditure rather than an operating expense for an HOA?

Answer: Replacement of the entire roof on a common building

Replacing a roof is a major capital expenditure because it extends the useful life of an asset, unlike routine operating expenses.

An association's governing documents require a reserve fund but the board has been spending reserve funds on operating expenses. What is the primary concern?

Answer: The association may lack funds for future major repairs, creating a special assessment risk

Misusing reserve funds depletes the money set aside for capital repairs, potentially forcing large special assessments when those repairs are needed.

What information does a cash flow statement provide that the income statement does not?

Answer: The timing and sources of actual cash inflows and outflows

The cash flow statement shows when and where cash actually moved, which differs from accrual-based revenue and expense recognition on the income statement.

Under GAAP, how should an HOA account for major common-area improvements that will last 20 years?

Answer: Capitalize the cost and depreciate it over its useful life

GAAP requires capitalizing long-lived assets and allocating their cost over their useful life through depreciation.

Which party is responsible for establishing and maintaining an adequate system of internal controls in a community association?

Answer: The board of directors

The board of directors bears ultimate responsibility for governance, including the design and maintenance of internal financial controls.

A reserve study recommendation shows the association is only 42% funded. Which action best addresses this shortfall over time?

Answer: Increase regular assessments and reserve contributions incrementally over several years

A gradual increase in reserve contributions through higher assessments is the most sustainable approach to improving funding status without a large one-time special assessment.