Key Terms: Financial Management

Question 1

Acceleration

Answer 1

The collection of all assessments due through the end of the fiscal year. For example, if an owner’s payments on the annual assessment are due monthly and become delinquent at the end of March, all monthly payments through December of that year are due immediately

Question 2

Accrual basis of accounting

Answer 2

This method records income when it is earned (or assessed to owners) and expenses when they are incurred or acquired.

Question 3

Assessment

Answer 3

An assessment is the owner’s financial obligation to the community association during a given period of
time—usually one year. It covers the owner’s share of the common expense, also known as “common expense liabilities” in some states.

Question 4

Assets

Answer 4

include anything owned that has value. Unlike commercial businesses, however, the actual land and
buildings of the community association are not generally shown as an asset

Question 5

Audit

Answer 5

An examination of the accounting records and procedures of an organization by a CPA for the purpose of verifying the accuracy and completeness of financial records

Question 6

Bad debt write-off

Answer 6

A bad debt write-off consists of recording an uncollectible debt as an expense that the association
must absorb. This usually requires a resolution of the board.

Question 7

Balance sheet

Answer 7

A balance sheet is a summary of a community’s financial position at a specific point in time.

Question 8

Baseline funding

Answer 8

The goal of this funding strategy is to keep the reserve cash balance above zero

Question 9

Cash basis of accounting

Answer 9

This method records income when it is collected and expenses when they are paid

Question 10

Certificate of deposit

Answer 10

When a CD is reinvested together with its accumulated interest, the ultimate yield will be
higher than the stated rate of interest

Question 11

Chapter 7 bankruptcy

Answer 11

Chapter 7 is called straight bankruptcy or liquidation. It involves the prompt conversion of all
the individual’s or corporation’s non-exempt property to cash, and payment of creditors to the extent possible

Question 12

Chapter 11 bankruptcy

Answer 12

Chapter 11 is called a reorganization because it is designed to allow for an orderly payment
to creditors that enable a corporation to continue

Question 13

Chapter 13 bankruptcy

Answer 13

Chapter 13 is used to reorganize personal or non-corporate debt. A plan is submitted to a
judge for paying off all or nearly all of the debt over a specified period of time.

Question 14

Chart of accounts

Answer 14

An organized list of titles, descriptions and assigned numbers of all accounts in an organization’s
general ledger. The assigned number helps you locate the account. The title describes the purpose of the account

Question 15

Commercial reporting method

Answer 15

Combines operating and reserve activities in the same column, as opposed to fund
reporting, which consists of preparing separate columns for operating, reserve and any special funds

Question 16

Compilation

Answer 16

A presentation of financial statements by a CPA without the assurance that the information conforms to GAAP

Question 17

CPA

Answer 17

Certified Public Accountant is an accountant who has passed certain examinations and met statutory and
licensing requirements of a US state

Question 18

Discretionary budget line items

Answer 18

These are items based on owner, board and committee desires. They are items people would like to have—given their values, lifestyle, and preferred level of service (e.g. social and recreational expenses, and picnic areas)

Question 19

Engagement letter

Answer 19

When your community hires a CPA, he or she will send an engagement letter. An engagement letter describes the nature of the work to be done, type of report to be prepared, fee for services and time frame for the assignment

Question 20

Expenses

Answer 20

Expenses are the cost of goods and services used to operate and maintain the community’s property

Question 21

Fair Debt Collection Practices Act:

Answer 21

Requires that the person who owes a debt receive written notice.

Question 22

FDIC

Answer 22

Federal Deposit Insurance Corporation, a government agency that guarantees investors’ deposits in member institutions.

Question 23

FHA

Answer 23

Federal Housing Administration. Regulates and influences such items as the amount of insurance a community association must carry, procedures for financial operations and requirements for the upkeep of property

Question 24

FHLMC

Answer 24

Federal Home Loan Mortgage Corporation. Buys mortgages from lenders and in doing so require certain types of insurance to be in place.

Question 25

FICA

Answer 25

Federal Insurance Contributions Act. This act requires employers and employees to make matching
contributions to Social Security. The employer must withhold the employee’s share of the tax from his or her wages or salary

Question 26

FLSA

Answer 26

Fair Labor Standards Act. This act addresses minimum wage requirements, maximum hours of work and overtime pay

Question 27

FNMA

Answer 27

Federal National Mortgage Association. Federally established secondary mortgage institution that may set requirements that your community association will have to meet if owners are to participate in their financing programs

Question 28

Foreclosure

Answer 28

Foreclosure is a legal proceeding filed in court whereby a party with a claim against an owner can claim
ownership of the unit involved in order to recover the money it is owed. The unit is usually auctioned by the court and sold to the highest bidder

Question 29

Full funding

Answer 29

The goal of this funding strategy is to attain and maintain the reserves at or near 100 percent as called
for on the component inventory

Question 30

Fund reporting method

Answer 30

Consists of preparing separate columns for operating, reserve, and any special funds

Question 31

GAAP

Answer 31

Generally Accepted Accounting Principles. Their purpose is to provide uniformity among reports from different organizations

Question 32

Historical trend budgeting

Answer 32

This method begins with the assumption that existing line items are needed. The amount
of funds allotted to each during the current year is adjusted for expected changes in the coming year

Question 33

Investment yield

Answer 33

Yield is simply the return received on the investment

Question 34

Investments

Answer 34

Investments involve the purchase of anything with money value for the purpose of generating additional money over time (e.g. savings accounts, certificates of deposit, U.S. Treasury securities and stocks)

Question 35

Liabilities

Answer 35

Liabilities consist of what is owed to others or collected in advance (e.g. owner assessments received prior
to the billed month).

Question 36

Lien

Answer 36

A lien is a legal claim by one party (community association) on the property of another (delinquent owner) to obtain the payment of a debt or the satisfaction of an obligation. Placing a lien on an owner’s property protects the community association’s interests.

Question 37

Major improvement expenses

Answer 37

Major improvement expenses consist of items that are not necessarily required, but are added to improve the overall welfare, safety or life of the residents—or to enhance the value of the community association as reflected in the resale value of units

Question 38

Members’ equity

Answer 38

Members’ equity is called the fund balance under the fund method of reporting. It equals the
difference between the community association’s assets and liabilities

Question 39

Modified cash basis of accounting

Answer 39

This method records income and expenses on a cash basis with selected items
recorded on an accrual basis. Modified cash varies in format depending on the number of items accrued.

Question 40

Net income

Answer 40

Net income is the amount left after deducting expenses from income.

Question 41

Net loss

Answer 41

A net loss occurs when expenses are greater than income

Question 42

Notes to financial statements

Answer 42

The notes accompany the CPA-prepared financial statements. These footnotes provide additional information to help the reader understand the community association’s financial situation

Question 43

Operating budget

Answer 43

The section of a budget devoted to operating activities includes operating expenses and major
improvement expenses—but not the replacement fund.

Question 44

Operating expenses

Answer 44

Operating expenses are those items that occur on a regular basis—day to day, week to week, month to month, and year to year

Question 45

Personal money judgment

Answer 45

A decision by a judge to allow the community association to claim the owner’s personal property to settle a delinquent account

Question 46

Reconciliation of expenses and revenue

Answer 46

After you draft both your operating and replacement fund budgets for the coming year, you must reconcile your estimated expenses with your community’s anticipated revenue. To reconcile means to bring together after a difference

Question 47

Replacement fund

Answer 47

The replacement fund consists of funds put aside—in reserve—for the replacement of major
components of a community’s common property.

Question 48

Representation letter

Answer 48

A letter from the CPA that states that the information the community association provides is true to the best of its knowledge

Question 49

Reserve cash flow statement

Answer 49

Shows the amount to be funded and the amount to be expended from the
replacement fund over a given period of time.

Question 50

Reserve study

Answer 50

A reserve study is a budget planning tool that considers the current status of the replacement fund
and determines a stable and equitable funding plan to offset the anticipated future major common area expenditures

Question 51

Revenue

Answer 51

Revenue consists of the collective items or amounts of income which, in the case of a community
association, are appropriated for public expenses

Question 52

Statement of cash flows

Answer 52

This is a summary of the flow of funds into and out of the community association.
Summaries are prepared for normal operations, investment activities, and any borrowing activities.

Question 53

Statement of income and expense

Answer 53

This report records the community association’s financial transactions during a given period of time—generally for a given month plus the fiscal year to date. It is a way to keep track of the community’s financial activity

Question 54

Threshold funding

Answer 54

This method is based on the baseline-funding concept. The minimum reserve cash balance in
threshold funding is set at a predetermined dollar amount

Question 55

Treasury bills

Answer 55

Treasury bills are short-term instruments that mature in 13, 26, or 52 week periods. They are issued in
minimum denominations of $10,000. Anything larger must be in $5,000 increments. As soon as one is purchased, the buyer receives the promised earnings. Then, when the bill matures, the buyer receives the face value (value indicated
in the wording of the T-bill)

Question 56

Treasury bonds

Answer 56

Treasury notes mature in one to 10 years. Treasury bonds mature in more than 10 years. Both notes
and bonds are issued in denominations from $1,000 to $100,000. They are also interest-bearing with interest paid every six months. When the note or bond matures, the buyer receives the full face value

Question 57

Zero-based budgeting

Answer 57

With this method, all line items are set to zero and the amount of funds allotted to each must
be justified