Nonprofit Nonprofit Financial Management 2 — Questions and Answers
Question 1: What is an endowment fund in a nonprofit context?
- A fund where the principal is invested and only income is spent according to donor intent (Correct answer)
- A fund held in reserve for emergency operating expenses
- A pool of restricted grants from government agencies
- A fund used exclusively for capital campaigns
Correct answer: A fund where the principal is invested and only income is spent according to donor intent
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?
- The percentage of total expenses spent on program activities versus overhead (Correct answer)
- The ratio of government grants to private donations
- The number of programs offered per staff member
- The ratio of paid staff to volunteers
Correct answer: The percentage of total expenses spent on program activities versus overhead
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?
- An external review of financial statements by a certified public accountant to verify accuracy (Correct answer)
- An internal review conducted by the finance committee
- An IRS examination triggered by Form 990 discrepancies
- A state inspection of grant management practices
Correct answer: An external review of financial statements by a certified public accountant to verify accuracy
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?
- Recording revenues when earned and expenses when incurred, providing a more accurate financial picture (Correct answer)
- Recording only cash transactions to simplify bookkeeping
- Tracking grant expenditures on a quarterly basis
- Reporting income and expenses on a calendar year basis only
Correct answer: Recording revenues when earned and expenses when incurred, providing a more accurate financial picture
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?
- A comparison of actual financial results against the approved budget (Correct answer)
- A forecast of future revenue based on historical trends
- A report showing differences between two fiscal years
- A donor-specific expense allocation report
Correct answer: A comparison of actual financial results against the approved budget
A budget variance report identifies differences between budgeted and actual figures, helping management and the board address financial surprises.
Question 6: What is the significance of net assets in a nonprofit's financial statements?
- Net assets represent the residual interest in the organization's assets after deducting liabilities (Correct answer)
- Net assets are the total revenue earned in a fiscal year
- Net assets are cash held in operating accounts only
- Net assets represent the total value of donated goods
Correct answer: Net assets represent the residual interest in the organization's assets after deducting liabilities
Net assets (previously called fund balance) represent the nonprofit's financial equity, classified as with or without donor restrictions.
Nonprofit Nonprofit Financial Management 2
What is an endowment fund in a nonprofit context?