CNC Financial Sustainability & Cash Flow Management 2

Question 1

An endowment fund differs from an operating reserve in that:

Accepted Answer

Endowments are permanent funds where only investment returns are typically distributed

Answer

A true endowment preserves the principal permanently; only a sustainable portion of investment returns (typically 4–5%) is distributed annually for operations or designated purposes.

Question 2

What is the typical annual payout rate applied to most nonprofit endowments?

Accepted Answer

4–5%

Answer

A 4–5% payout rate is widely recognized as sustainable because it generally preserves the endowment's purchasing power while providing consistent annual distributions.

Question 3

When is a 'deficit budget' an acceptable planning tool for a nonprofit?

Accepted Answer

When the organization intentionally draws down reserves for strategic purposes

Answer

A deficit budget can be a deliberate strategic decision to deploy previously accumulated reserves for important organizational investments or to bridge a planned transition period.

Question 4

Which document do nonprofit boards primarily use to monitor monthly financial performance?

Accepted Answer

Statement of financial activity compared to budget

Answer

Monthly budget-to-actual financial statements allow boards to identify revenue and expense variances quickly and make timely corrective decisions throughout the year.

Question 5

What is 'functional expense allocation' in nonprofit accounting?

Accepted Answer

Dividing costs among program services, management/general, and fundraising

Answer

Functional expense allocation categorizes and distributes organizational costs across program services, management and general, and fundraising functions as required by nonprofit GAAP (ASC 958).

(CNC) Certified Nonprofit Consultant Practice Test

(CNC) Certified Nonprofit Consultant Practice Test

CNC Financial Sustainability & Cash Flow Management 2