Nonprofit Nonprofit Financial Management 1 — Questions and Answers
Question 1: What IRS form must most US public charities file annually?
- Form 990 (Correct answer)
- Form 1023
- Form W-2
- Form 1099
Correct answer: Form 990
Form 990 is the annual information return that tax-exempt organizations file with the IRS to report on their finances, governance, and programs.
Question 2: What is the difference between restricted and unrestricted funds in a nonprofit?
- Restricted funds must be used for donor-specified purposes; unrestricted funds can be used at the organization's discretion (Correct answer)
- Restricted funds come from grants; unrestricted funds come from individual donors
- Restricted funds are held in endowments; unrestricted funds are operating funds
- Restricted funds require board approval; unrestricted funds do not
Correct answer: Restricted funds must be used for donor-specified purposes; unrestricted funds can be used at the organization's discretion
Restricted funds carry donor-imposed conditions on their use, while unrestricted funds give the organization flexibility to apply them where needed most.
Question 3: What is an operating reserve in nonprofit financial management?
- Unrestricted funds set aside to cover short-term operational needs or unexpected shortfalls (Correct answer)
- A bank account for restricted grants
- Funds designated for capital improvements
- Endowment funds invested for long-term growth
Correct answer: Unrestricted funds set aside to cover short-term operational needs or unexpected shortfalls
An operating reserve is a savings buffer that helps nonprofits sustain operations during revenue gaps, emergencies, or transitions.
Question 4: What financial statement summarizes a nonprofit's assets, liabilities, and net assets at a specific point in time?
- Statement of Financial Position (Correct answer)
- Statement of Activities
- Statement of Cash Flows
- Statement of Functional Expenses
Correct answer: Statement of Financial Position
The Statement of Financial Position (equivalent to a balance sheet) shows what the organization owns, owes, and its net asset balance at a specific date.
Question 5: What is the purpose of the Statement of Functional Expenses for nonprofits?
- To show how expenses are allocated across program, management, and fundraising functions (Correct answer)
- To report total revenue earned during the year
- To list all restricted grant expenditures
- To summarize payroll taxes paid to the IRS
Correct answer: To show how expenses are allocated across program, management, and fundraising functions
The Statement of Functional Expenses breaks down costs by function, showing donors and watchdogs how much goes to programs versus overhead.
Question 6: What is cash basis accounting in the context of a nonprofit?
- Recording revenues and expenses when cash is received or paid (Correct answer)
- Recording revenues when earned and expenses when incurred
- Tracking only restricted fund transactions
- Using an endowment fund for daily operations
Correct answer: Recording revenues and expenses when cash is received or paid
Cash basis accounting records transactions only when money actually changes hands, which is simpler but less accurate for complex nonprofits.
Nonprofit Nonprofit Financial Management 1
What IRS form must most US public charities file annually?