CRM Financial Management & Budgeting 3 — Questions and Answers
Question 1: Under accrual-basis accounting used in residential property management, rent revenue is recognized when:
- Cash is received from the tenant
- It is earned (due), regardless of when collected (Correct answer)
- The lease is signed
- The unit is occupied for the first time
Correct answer: It is earned (due), regardless of when collected
Accrual accounting records revenue when it is earned and expenses when incurred, not when cash changes hands.
Question 2: A property manager is asked to calculate the Debt Service Coverage Ratio (DSCR). The NOI is $480,000 and annual debt service is $360,000. What is the DSCR?
- 0.75
- 1.20
- 1.33 (Correct answer)
- 1.50
Correct answer: 1.33
DSCR = NOI ÷ Debt Service = $480,000 ÷ $360,000 = 1.33, indicating the property generates 33% more income than needed to cover debt.
Question 3: Which of the following is classified as a fixed operating expense for a residential property?
- Landscaping costs that vary by season
- Property insurance premiums (Correct answer)
- Utility costs that fluctuate with occupancy
- Maintenance labor billed hourly
Correct answer: Property insurance premiums
Property insurance premiums are contractually set for the policy period and do not vary with occupancy or usage, making them fixed expenses.
Question 4: A trust account for security deposits must be:
- Commingled with the property's operating account for efficiency
- Kept separate and used only for purposes permitted by state law (Correct answer)
- Invested in equities to maximize returns for the owner
- Returned to the owner at the end of each fiscal year
Correct answer: Kept separate and used only for purposes permitted by state law
State landlord-tenant laws require security deposits to be held in a separate trust account and used only for legally permitted purposes such as unpaid rent or damages.
Question 5: When a property manager prepares a monthly owner's statement, which item represents funds NOT available for distribution to the owner?
- Net cash flow after all expenses
- Reserve contributions set aside for future capital repairs (Correct answer)
- Rental income collected during the month
- Late fees collected from tenants
Correct answer: Reserve contributions set aside for future capital repairs
Reserve contributions are withheld from distributions because they are earmarked for future capital expenditures, not current operating profit.
Question 6: A 150-unit complex has a potential gross income of $2,400,000, a 6% vacancy rate, and $48,000 in other income. What is the Effective Gross Income?
- $2,304,000
- $2,352,000 (Correct answer)
- $2,208,000
- $2,256,000
Correct answer: $2,352,000
EGI = $2,400,000 − ($2,400,000 × 0.06) + $48,000 = $2,400,000 − $144,000 + $48,000 = $2,352,000.
Question 7: Zero-based budgeting differs from incremental budgeting primarily because it:
- Uses prior-year actuals adjusted for inflation
- Requires every expense to be justified from scratch each budget cycle (Correct answer)
- Focuses exclusively on capital expenditures
- Allocates budgets based on department headcount
Correct answer: Requires every expense to be justified from scratch each budget cycle
Zero-based budgeting requires each line item to be re-justified every period rather than simply adjusting historical figures, eliminating inherited inefficiencies.
CRM Financial Management & Budgeting 3
Under accrual-basis accounting used in residential property management, rent revenue is recognized when: