Nonprofit Nonprofit Financial Management 2

Question 1

What is an endowment fund in a nonprofit context?

Accepted Answer

A fund where the principal is invested and only income is spent according to donor intent

Answer

An endowment is a permanent fund where the principal is preserved in perpetuity and investment returns support ongoing operations or specific programs.

Question 2

What does the program expense ratio measure?

Accepted Answer

The percentage of total expenses spent on program activities versus overhead

Answer

The program expense ratio shows how efficiently a nonprofit allocates resources to its core mission activities compared to administrative and fundraising costs.

Question 3

What is an independent audit in nonprofit financial management?

Accepted Answer

An external review of financial statements by a certified public accountant to verify accuracy

Answer

An independent audit is conducted by an external CPA firm and provides the highest level of assurance that financial statements are free from material misstatement.

Question 4

What is accrual accounting and why is it preferred for nonprofits under GAAP?

Accepted Answer

Recording revenues when earned and expenses when incurred, providing a more accurate financial picture

Answer

Accrual accounting matches revenues to the period they are earned and expenses to the period incurred, giving a more accurate view of financial health.

Question 5

What is a budget variance report?

Accepted Answer

A comparison of actual financial results against the approved budget

Answer

A budget variance report identifies differences between budgeted and actual figures, helping management and the board address financial surprises.

Nonprofit Practice Test

Nonprofit Practice Test

Nonprofit Nonprofit Financial Management 2