Chapter 12: Financial Management

Test Bank

Multiple Choice

1. ______ refers to the method used to record financial transactions.

A. Accounting

B. Bookkeeping

C. Record keeping

D. Financial management

Learning Objective: 12-1: Define key terms and concepts in nonprofit financial management.

Cognitive Domain: Knowledge

Answer Location: Definitions of Key Concepts

Difficulty Level: Easy

2. What term describes the rules by which financial transactions are classified?

A. accounting

B. bookkeeping

C. data integrity policies

D. financial management

Learning Objective: 12-1: Define key terms and concepts in nonprofit financial management.

Cognitive Domain: Knowledge

Answer Location: Definitions of Key Concepts

Difficulty Level: Easy

3. What practice involves the analysis of various financial ratios?

A. financial analysis

B. financial accounting

C. financial management

D. managerial accounting

Learning Objective: 12-1: Define key terms and concepts in nonprofit financial management.

Cognitive Domain: Knowledge

Answer Location: Definitions of Key Concepts

Difficulty Level: Easy

4. What type of funds are generally invested in secure, short-term instruments?

A. cash flow

B. endowment

C. unrestricted

D. operating reserves

Learning Objective: 12-1: Define key terms and concepts in nonprofit financial management.

Cognitive Domain: Knowledge

Answer Location: Overview of Nonprofit and Personal Finances

Difficulty Level: Easy

5. Which type of donation needs to be invested in perpetuity?

A. liquid assets

B. pure endowment

C. unrestricted funds

D. quasi-endowment

Learning Objective: 12-4: Explain principles of managing endowment funds.

Cognitive Domain: Knowledge

Answer Location: Overview of Nonprofit and Personal Finances

Difficulty Level: Easy

6. Accounting on a/an ______ basis takes money earned as well as obligations for expenditures not yet incurred.

A. cash

B. credit

C. accrual

D. multilevel

Learning Objective: 12-1: Define key terms and concepts in nonprofit financial management.

Cognitive Domain: Knowledge

Answer Location: Understanding Nonprofit Finances

Difficulty Level: Easy

7. What type of financial statement provides a snapshot of an organization’s finances taken at a point in time?

A. activities

B. cash flows

C. financial position

D. functional expenses

Learning Objective: 12-2: Explain financial statements developed by nonprofit organizations and the role of audits.

Cognitive Domain: Knowledge

Answer Location: Statement of Financial Position

Difficulty Level: Easy

8. Which type of financial statement summaries an organization’s assets and liabilities?

A. cash flows

B. activities

C. financial position

D. functional expenses

Learning Objective: 12-2: Explain financial statements developed by nonprofit organizations and the role of audits.

Cognitive Domain: Knowledge

Answer Location: Statement of Financial Position

Difficulty Level: Easy

9. Which type of financial statement shows how every category of expense was allocated?

A. activities

B. cash flows

C. financial position

D. functional expenses

Learning Objective: 12-2: Explain financial statements developed by nonprofit organizations and the role of audits.

Cognitive Domain: Knowledge

Answer Location: Statement of Functional Expenses

Difficulty Level: Easy

10. What is a decline in the value of an asset called?

A. inflation

B. deflation

C. amortization

D. depreciation

Learning Objective: 12-2: Explain financial statements developed by nonprofit organizations and the role of audits.

Cognitive Domain: Knowledge

Answer Location: Statement of Functional Expenses

Difficulty Level: Easy

11. Which term is used to describe an organizational operating surplus?

A. ratio

B. solvency

C. liquidity

D. profitability

Learning Objective: 12-3: Summarize key financial ratios used in financial management of nonprofit organizations.

Cognitive Domain: Knowledge

Answer Location: Using Financial Ratios

Difficulty Level: Easy

12. An organization that is ______ possesses sufficient cash to meet its obligations as they come due.

A. liquid

B. solvent

C. restricted

D. unrestricted

Learning Objective: 12-3: Summarize key financial ratios used in financial management of nonprofit organizations.

Cognitive Domain: Knowledge

Answer Location: Using Financial Ratios

Difficulty Level: Easy

13. Assessing ______ requires evaluating whether an organization is financially strong or in jeopardy.

A. liquidity

B. profitability

C. asset management

D. long-term solvency

Learning Objective: 12-3: Summarize key financial ratios used in financial management of nonprofit organizations.

Cognitive Domain: Knowledge

Answer Location: Using Financial Ratios

Difficulty Level: Easy

14. What concept reflects investing an endowment in a long-term growth portfolio?

A. total return

B. spending limits

C. term endowment

D. asset management

Learning Objective: 12-4: Explain principles of managing endowment funds

Cognitive Domain: Knowledge

Answer Location: Managing Endowment Funds

Difficulty Level: Easy

15. The goal of the ______ is to provide enough payout each year to meet the needs of current programs while allowing the value of the endowment principal to grow.

A. cash budget

B. capital budget

C. spending limit

D. operating budget

Learning Objective: 12-4: Explain principles of managing endowment funds

Cognitive Domain: Knowledge

Answer Location: Managing Endowment Funds

Difficulty Level: Easy

16. What budget approach requires organizations to justify their budgets from the ground up?

A. zero-based

B. cost center

C. incremental

D. use-it-or-lose-it

Learning Objective: 12-5: Describe concepts related to developing and managing nonprofit budgets.

Cognitive Domain: Knowledge

Answer Location: Developing and Managing the Budget

Difficulty Level: Easy

17. Which types of financial policies does Zietlow argue are doomed to fail?

A. internal

B. external

C. restrictive

D. prescriptive

Learning Objective: 12-6: Identify circumstances that pose financial risks to nonprofit organizations.

Cognitive Domain: Knowledge

Answer Location: Financial Policies and Controls

Difficulty Level: Easy

18. A board of directors is identifying allowable ranges for financial indicators. The board is developing ______.

A. spending limits

B. statements of financial position

C. financial and financial management policies

D. accountability and regulatory compliance policies

Learning Objective: 12-6: Identify circumstances that pose financial risks to nonprofit organizations.

Cognitive Domain: Comprehension

Answer Location: Financial Policies and Controls

Difficulty Level: Medium

19. ______ involve(s) ensuring the privacy of organizational records.

A. Data integrity policies

B. Managerial accounting

C. Accountability and regulatory compliance policies

D. The Uniform Management of Institutional Funds Act

Learning Objective: 12-6: Identify circumstances that pose financial risks to nonprofit organizations.

Cognitive Domain: Knowledge

Answer Location: Financial Policies and Controls

Difficulty Level: Easy

20. A fundamental principle of ______ requires that no one person handles an entire financial transaction.

A. endowments

B. internal control

C. external control

D. data integrity policies

Learning Objective: 12-6: Identify circumstances that pose financial risks to nonprofit organizations.

Cognitive Domain: Knowledge

Answer Location: Financial Policies and Controls

Difficulty Level: Easy

21. According to Worth, nonprofit organizations measure their success through the ______.

A. fund-raising results

B. number of clients served

C. financial and program results

D. number of endowments established

Learning Objective: 12-6: Identify circumstances that pose financial risks to nonprofit organizations.

Cognitive Domain: Knowledge

Answer Location: Chapter Introduction

Difficulty Level: Easy

22. The Brown Foundation gave a local nonprofit organization a $1 million endowment. This action is an example of what type of revenue source?

A. earned income

B. fee for service

C. philanthropic gift

D. government grant

Learning Objective: 12-1: Define key terms and concepts in nonprofit financial management.

Cognitive Domain: Comprehension

Answer Location: Chapter Introduction

Difficulty Level: Medium

23. A donor gave a nonprofit organization a $10,000 gift to pay the implementation costs of a new program. This is an example of a(an) ______.

A. endowment

B. trade benefit

C. permanent restriction

D. temporary restriction

Learning Objective: 12-1: Define key terms and concepts in nonprofit financial management.

Cognitive Domain: Comprehension

Answer Location: Chapter Introduction

Difficulty Level: Medium

24. What term indicates the difference between assets and liabilities?

A. net assets

B. trade benefits

C. physical assets

D. accrual liabilities

Learning Objective: 12-1: Define key terms and concepts in nonprofit financial management.

Cognitive Domain: Comprehension

Answer Location: Statement of Financial Position

Difficulty Level: Medium

25. A nonprofit accountant is writing a comment explaining extenuating circumstances related to data reported in a statement of activities. The accountant is completing which type of financial statement?

A. addendum

B. required disclosures

C. notes to the financial statements

D. statement of functional expenses

Learning Objective: 12-1: Define key terms and concepts in nonprofit financial management.

Cognitive Domain: Comprehension

Answer Location: Required Disclosures and Notes to Financial Statements

Difficulty Level: Medium

26. A nonprofit chief executive officer (CEO) is comparing program expenses to contributed income. The CEO is using a(an) ______ to assess organizational performance.

A. audit

B. balance sheet

C. financial ratio

D. depreciation formula

Learning Objective: 12-3: Summarize key financial ratios used in financial management of nonprofit organizations.

Cognitive Domain: Comprehension

Answer Location: Using Financial Ratios

Difficulty Level: Medium

27. A chief executive officer is telling a board of directors how much revenue was raised by renting out excess building space. This action is an example of ______.

A. being underwater

B. managing fixed assets

C. liquid asset management

D. assessing long-term solvency

Learning Objective: 12-3: Summarize key financial ratios used in financial management of nonprofit organizations.

Cognitive Domain: Comprehension

Answer Location: Using Financial Ratios

Difficulty Level: Medium

28. A nonprofit organization offers its employees a health benefit option. This type of budget item is a/an ______ expense.

A. fixed

B. liquid

C. controllable

D. uncontrollable

Learning Objective: 12-5: Describe concepts related to developing and managing nonprofit budgets.

Cognitive Domain: Comprehension

Answer Location: Developing and Managing the Budget

Difficulty Level: Medium

29. A nonprofit organization depends on earned income as its only revenue source. According to Worth, this action is an example of a/an ______.

A. liability

B. business risk

C. spending limit

D. equity concept

Learning Objective: 12-6: Identify circumstances that pose financial risks to nonprofit organizations.

Cognitive Domain: Comprehension

Answer Location: Using Financial Ratios

Difficulty Level: Medium

30. A nonprofit board of directors is establishing an endowment investment portfolio to earn enough income to match future costs. This is an example of applying the ______ concept.

A. total return

B. least return

C. minimum return

D. equity minimum

Learning Objective: 12-1: Define key terms and concepts in nonprofit financial management.

Cognitive Domain: Comprehension

Answer Location: Chapter Summary

Difficulty Level: Easy

True/False

1. Physical assets serve the same purpose as operating reserves.

Learning Objective: 12-1: Define key terms and concepts in nonprofit financial management.

Cognitive Domain: Knowledge

Answer Location: Overview of Nonprofit and Personal Finances

Difficulty Level: Easy

2. A board of directors may withdraw funds from a quasi-endowment.

Learning Objective: 12-4: Explain principles of managing endowment funds.

Cognitive Domain: Knowledge

Answer Location: Managing Endowment Funds

Difficulty Level: Easy

3. Bookkeeping is a method by which financial transactions are recorded.

Learning Objective: 12-1: Define key terms and concepts in nonprofit financial management.

Cognitive Domain: Knowledge

Answer Location: Definitions of Key Concepts

Difficulty Level: Easy

4. Accounting consists of rules for reporting financial transactions.

Learning Objective: 12-1: Define key terms and concepts in nonprofit financial management.

Cognitive Domain: Knowledge

Answer Location: Definitions of Key Concepts

Difficulty Level: Easy

5. Having diverse sources of revenue minimizes risk and maximizes autonomy for a nonprofit.

Learning Objective: 12-1: Define key terms and concepts in nonprofit financial management.

Cognitive Domain: Knowledge

Answer Location: Definitions of Key Concepts

Difficulty Level: Easy

6. Endowment funds are invested in perpetuity.

Learning Objective: 12-4: Explain principles of managing endowment funds.

Cognitive Domain: Knowledge

Answer Location: Managing Endowment Funds

Difficulty Level: Easy

7. Equipment is considered a fixed asset.

Learning Objective: 12-3: Summarize key financial ratios used in financial management of nonprofit organizations.

Cognitive Domain: Knowledge

Answer Location: Using Financial Ratios

Difficulty Level: Easy

8. Accrual basis accounting records financial transactions even when the organization does not have sufficient cash flow.

Learning Objective: 12-1: Define key terms and concepts in nonprofit financial management.

Cognitive Domain: Knowledge

Answer Location: Definitions of Key Concepts

Difficulty Level: Easy

9. A statement of financial position shows a snapshot of the organization’s assets and liabilities at a point in time.

Learning Objective: 12-1: Define key terms and concepts in nonprofit financial management.

Cognitive Domain: Knowledge

Answer Location: Statement of Financial Position

Difficulty Level: Easy

10. Endowment management is governed by state law.

Learning Objective: 12-4: Explain principles of managing endowment funds.

Cognitive Domain: Knowledge

Answer Location: Managing Endowment Funds

Difficulty Level: Easy

11. Depreciation refers to the differences between assets and liabilities.

Learning Objective: 12-1: Define key terms and concepts in nonprofit financial management.

Cognitive Domain: Knowledge

Answer Location: Statement of Functional Expenses

Difficulty Level: Easy

12. Nonprofits should have an operating budget, a capital budget, and a cash budget.

Learning Objective: 12-5: Describe concepts related to developing and managing nonprofit budgets.

Cognitive Domain: Knowledge

Answer Location: Developing and Managing the Budget

Difficulty Level: Easy

Short Answer

1. Compare and contrast the two types of accounting.

Learning Objective: 12-1: Define key terms and concepts in nonprofit financial management.

Cognitive Domain: Analysis

Answer Location: Definitions of Key Concepts

Difficulty Level: Hard

2. Compare and contrast the two types of endowments.

Learning Objective: 12-4: Explain principles of managing endowment funds.

Cognitive Domain: Analysis

Answer Location: Managing Endowment Funds

Difficulty Level: Hard

3. Compare and contrast physical assets and financial assets.

Learning Objective: 12-1: Define key terms and concepts in nonprofit financial management.

Cognitive Domain: Analysis

Answer Location: Understanding Nonprofit Finances

Difficulty Level: Hard

4. Explain the Uniform Prudent Management of Institutional Funds Act of 2006.

Learning Objective: 12-4: Explain principles of managing endowment funds.

Cognitive Domain: Comprehension

Answer Location: Managing Endowment Funds

Difficulty Level: Medium

5. Examine three separate budgets that nonprofit organizations should have and determine what each budget tracks.

Learning Objective: 12-5: Describe concepts related to developing and managing nonprofit budgets.

Cognitive Domain: Comprehension

Answer Location: Developing and Managing the Budget

Difficulty Level: Medium

6. Identify how the use-it-or-lose-it approach to annual budgets can contribute to needless spending.

Learning Objective: 12-5: Describe concepts related to developing and managing nonprofit budgets.

Cognitive Domain: Comprehension

Answer Location: Developing and Managing the Budget

Difficulty Level: Medium

7. Explain the differences between “cost centers” and “profit centers.”

Learning Objective: 12-5: Describe concepts related to developing and managing nonprofit budgets.

Cognitive Domain: Comprehension

Answer Location: Developing and Managing the Budget

Difficulty Level: Medium

8. Distinguish the differences between operating reserves, quasi-endowment funds, and permanently restricted endowment funds.

Learning Objective: 12-1: Define key terms and concepts in nonprofit financial management.

Cognitive Domain: Analysis

Answer Location: Understanding Nonprofit Finances

Difficulty Level: Hard

9. Compare and contrast statements of financial position, statements of activities, statements of cash flows, and statements of functional expenses.

Learning Objective: 12-1: Define key terms and concepts in nonprofit financial management.

Cognitive Domain: Analysis

Answer Location: Understanding Nonprofit Finances

Difficulty Level: Hard

10. Identify and justify the responsibilities of a nonprofit’s internal audit committee.

Learning Objective: 12-2: Explain financial statements developed by nonprofit organizations and the role of audits.

Cognitive Domain: Analysis

Answer Location: Audits

Difficulty Level: Hard