CMCA Financial Reporting and Controls 4 — Questions and Answers
Question 1: What does 'percent funded' measure in the context of reserve funding?
- The percentage of homeowners current on assessments
- The ratio of actual reserve balance to the fully funded ideal (Correct answer)
- The portion of the annual budget allocated to reserves
- The percentage of reserve projects completed this year
Correct 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.
Question 2: Which of the following is considered a capital expenditure rather than an operating expense for an HOA?
- Monthly landscaping contract
- Replacement of the entire roof on a common building (Correct answer)
- Annual insurance premium
- Utility bills for common areas
Correct 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.
Question 3: 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?
- Operating expenses will decrease next year
- The association may lack funds for future major repairs, creating a special assessment risk (Correct answer)
- The reserve study will automatically be updated
- The board must dissolve the committee
Correct 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.
Question 4: What information does a cash flow statement provide that the income statement does not?
- Total revenue and expenses for the period
- The timing and sources of actual cash inflows and outflows (Correct answer)
- The association's net worth at period end
- Depreciation of common area assets
Correct 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.
Question 5: Under GAAP, how should an HOA account for major common-area improvements that will last 20 years?
- Expense the entire cost in the year of purchase
- Capitalize the cost and depreciate it over its useful life (Correct answer)
- Record it as a liability until fully paid off
- Charge it directly to the reserve fund balance
Correct 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.
Question 6: Which party is responsible for establishing and maintaining an adequate system of internal controls in a community association?
- The independent auditor
- The management company
- The board of directors (Correct answer)
- The state regulatory agency
Correct answer: The board of directors
The board of directors bears ultimate responsibility for governance, including the design and maintenance of internal financial controls.
Question 7: A reserve study recommendation shows the association is only 42% funded. Which action best addresses this shortfall over time?
- Immediately levy a special assessment for the entire shortfall
- Increase regular assessments and reserve contributions incrementally over several years (Correct answer)
- Stop all reserve contributions and use operating surplus instead
- Defer all reserve projects indefinitely
Correct 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.
CMCA Financial Reporting and Controls 4
What does 'percent funded' measure in the context of reserve funding?