CPM Financial Management 2 — Questions and Answers
Question 1: What does 'capitalization rate' (cap rate) represent?
- The mortgage interest rate
- NOI divided by property value, expressing the unleveraged return (Correct answer)
- Cash flow divided by equity
- Gross income divided by purchase price
Correct answer: NOI divided by property value, expressing the unleveraged return
The cap rate equals NOI divided by property value and represents the unleveraged rate of return on a property.
Question 2: In property budgeting, what is a 'variance'?
- The difference between budgeted and actual figures (Correct answer)
- The annual increase in rent
- The difference between two comparable properties' rents
- The gap between gross and net income
Correct answer: The difference between budgeted and actual figures
A variance is the difference between a budgeted amount and actual performance, used to identify areas needing management attention.
Question 3: Which budget type projects expected income and expenses for a forthcoming 12-month period?
- Capital budget
- Operating budget (Correct answer)
- Cash flow budget
- Retrospective budget
Correct answer: Operating budget
An operating budget forecasts revenues and expenses for daily property operations over a 12-month period.
Question 4: What is a 'reserve fund' in property management?
- Emergency line of credit from the bank
- Money set aside from operations for future major repairs or replacements (Correct answer)
- The owner's personal savings account
- Funds held in escrow for tenant deposits
Correct answer: Money set aside from operations for future major repairs or replacements
A reserve fund accumulates money over time to cover anticipated major capital expenditures such as roof replacement or parking lot resurfacing.
Question 5: Which method of accounting records revenue and expenses when cash is actually received or paid?
- Accrual accounting
- Cash-basis accounting (Correct answer)
- Modified accrual accounting
- Double-entry accounting
Correct answer: Cash-basis accounting
Cash-basis accounting records transactions only when cash changes hands, making it simpler but less reflective of true financial performance.
Question 6: What does a 'proforma' financial statement represent in real estate?
- Audited historical financial results
- Projected future income and expenses used to evaluate investment potential (Correct answer)
- Year-end tax filing for the property
- A statement of actual cash collected
Correct answer: Projected future income and expenses used to evaluate investment potential
A proforma is a forward-looking financial projection that estimates expected income, expenses, and returns for a real estate investment.
CPM Financial Management 2
What does 'capitalization rate' (cap rate) represent?