Certified Association Executive (CAE) Study
Terms UPDATED ACTUAL Exam
Questions and CORRECT Answers
Budget: Strategic Program Budgeting - CORRECT ANSWER - Strategic Program
Budgeting is allocating salaries and other overhead to know the true profitability of its products
and services. This concept is a best practice in program budgeting. It is achieved through
conducting a systematic study of allocation of staff time to program categories, then applying the
calculated prorated share of overhead expense to the programs identified.
Branding - CORRECT ANSWER - Branding is a marketing process based in the concept
of singularity. It creates in the mind of the prospect the perception that there is no product on the
market quite like yours. The power of a brand is its ability to influence purchasing behavior.
Branding incorporates a singular look, feel and message in building a belief about your
association and its products.
Audit: Clean Audit vs. Unqualified - CORRECT ANSWER - Audit Clean - A clean
opinion provides the highest level of assurance that the Statement of Financial Position fairly
presents the organization's financial position; the Statement of Activities fairly presents the
results of the organization's operations; and the Statement of Cash Flows fairly presents its cash
flows. Unqualified - An unqualified opinion provides the highest level of assurance that an audit
can provide with attention given to a particular matter and provides for disclosure of additional
financial statements provided or draws attention to an additional important matter.
Accounting Practice: Segregation of Duties - CORRECT ANSWER - No individual
should control all four aspects of any financial transaction: Initiation (check requests);
Authorization (approval to pay); Asset custody (keeping the checkbook); Recording the
transaction (posting)
Financial Controls: Segregation of Duties - CORRECT ANSWER - Management is
responsible for the organization's financial reports and the information contained within; the
auditor's role is to verify the amounts included in the reports. In its fiduciary responsibility, it is
the Board's job to hire the external auditor and receive the report; it is a conflict of interest for the
CSE or CFO to hire the auditor. Financial records must agree with the financial report certified
by the auditor; any changes the auditor deems necessary are subject to acceptance by
,management. Sarbanes-Oxley has created regulatory requirements for corporations related to the
audit function.
Financial Controls: Sarbanes-Oxley - CORRECT ANSWER - Sarbanes-Oxley requires
compliance with a comprehensive reform of accounting procedures to promote and improve the
quality and transparency of financial reporting internally and externally. While the initial law
applies to publicly held corporations, many of the requirements are being practiced in the non-
profit community in expectation of expansion of the law's outreach. Sarbanes-Oxley requires
establishment of an audit committee and: -Requires the audit committee to have a financial
expert as a member -Requires the audit committee to hire the auditor -Requires five-year audit
partner rotation -Requires audit committees to establish procedures for processing whistle blower
complaints by employees -Requires a code of ethics for financial officers -Increases penalties for
document destruction or alteration -Requires certifications by the CEO and the chief financial
officer regarding the financial condition of the company and internal controls. Nonprofit
recommendations include: -A code of ethics for the board of directors -Regular board training -
Regular board self-evaluations -Audit committee members who are financially literate.
Financial Controls: Annual Audit - CORRECT ANSWER - No individual should control
all essential aspects of any transaction: initiation, authorization, asset custody and recording.
Segregation is the heart of any internal control system. Other steps include: a well-designed
record keeping and information system, a sound budgetary process, and an independent audit.
Financial Controls: Factors essential - CORRECT ANSWER - Four factors essential to
good internal financial controls: 1. Clear lines of authority; 2. Clear definition and acceptance of
responsibility; 3. Authority commensurate with responsibility; 4. Proper training.
Financial Statements: Management Letter - CORRECT ANSWER - Is issued by an
independent auditor. The Management Letter communicates those areas that management needs
to address in order to come into compliance with GAAP accounting practices.
Financial Statements: Combined Cash & Accrual Statement - CORRECT ANSWER - In a
combined statement, certain transactions are recorded on an accrual basis and others are recorded
on a cash basis. Usually, unpaid bills are recorded on accrual and uncollected income is recorded
on the cash basis. Many organizations keep books on the cash basis and convert them to accrual
at the end of the month for accounting purposes.
,Financial projections - CORRECT ANSWER - Financial projections forecast future
financial results. Usually presented in a "pro-forma" statement, financial projections are
generally speculative and investors are cautioned to recognize the projections are not guarantees
of performance. Sound financial projections should be based on credible assumptions, a
conservative projection of revenue and an aggressive projection of expenses.
Financial Key Indicators - CORRECT ANSWER - Selected by leaders, they are
quantitative measurements of strategic importance that will indicate a fairly accurate picture of
the organization in relation to its strategic plan. Indicators might include: # of new members, %
of retained members, # of new business starts, # of organizational members participating in
programs, # of accounts
Financial Terms: Classes of Funds - Restricted, Unrestricted & Temp Restricted - CORRECT
ANSWER - There are three classes of funds in a 501(c)3 organization: unrestricted,
temporarily restricted (as to time and/or purpose), and permanently restricted. Unrestricted funds
are funds which can be used at the discretion of the management within the range of uses
defined. Temporarily restricted net assets result from contributions of assets when use by the
organization is limited by donor-imposed stipulations that either expire or can be fulfilled and
removed by actions of the organization. These assets are shown on the Statement of Financial
Position. These assets are also reported on the 990 Long Form. Permanently restricted net assets
result from contributions where the donor has stipulated a specific use that do not expire with
time and cannot be shifted by the organization. "Endowments" are one common type of
permanently restricted net assets.
Financial Terms: Association Reserves - CORRECT ANSWER - Net assets minus net
liabilities. This is the "surplus" or "rainy day" fund for an association. Reserves are usually
protected by the board. Some organizations budget to contribute to the reserve fund annually;
others contribute if they have extra cash at the end of the year.
Financial Terms: Accrual vs. Cash Accounting - CORRECT ANSWER - Accrual-basis
accounting recognizes revenues when earned and expenses when incurred. Cash-basis
accounting recognizes revenue when cash is received and expenses when cash is expended. Best
practice in association accounting is to use accrual accounting; allocating dues when earned
monthly, rather than recording a lump sum when received. Accrual accounting gives a much
better financial picture and cash flow projection than cash accounting.
, Financial Terms: Chart of Accounts - CORRECT ANSWER - A system for organizing
financial data, a listing of all the line item accounts being used by the organization. Numbers are
assigned to each account to facilitate account identification. Accurate and appropriate entry into
proper accounts is key to sound financial management and reporting.
Financial Terms: Capital Budget - CORRECT ANSWER - The financial plan for long-
term expenditures such as land, buildings or equipment, including depreciation.
Financial Statements: Statement of Financial Position - CORRECT ANSWER - The
Statement of Financial Position was formerly known as the Balance Sheet. It summarizes
financial makeup of the organization at a point in time. It reflects: the assets owned by the
organization, the liabilities owed by the organization, and the residual net assets (representing net
worth.)
Financial Statements: Statement of Activities - CORRECT ANSWER - The Statement of
Activities was previously called the Statement of Revenue and Expenses or the Profit/Loss
Statement. It shows the organization's financial activity by the month and on a year-to-date basis.
It reports: revenue generated, expenses incurred, and results in net income or net loss.
Financial Statements: Reporting capital gains - CORRECT ANSWER - Capital gains or
losses should be reported in the unrestricted class. There are two exceptions to the rule. Gains
must be reported in the restricted class if: 1) there are explicit donor restrictions on the gains; 2)
applicable state law is judged by the organization's governing board to require the retention of
some or all of the capital gains/losses in the restricted class.
Financial Terms: Net Assets - CORRECT ANSWER - Residual value of the association
after liabilities have been paid. Contains three classes of assets: unrestricted net assets,
temporarily restricted net assets, and permanently restricted net assets.
Financial Terms: Financial Ratios - CORRECT ANSWER - Liquidity ratio measures the
organization's ability to pay its short-term obligations. Current ratio measured current assets
divided by current liabilities. Profitability ratio measures the profits (losses) over a specified
period of time. Coverage ratio measures the projections for the interest and principal payments to
long-term creditors and investors. Activity ratio measures the resources required to carry out
certain activities and are sometimes referred to as efficiency ratios.
Terms UPDATED ACTUAL Exam
Questions and CORRECT Answers
Budget: Strategic Program Budgeting - CORRECT ANSWER - Strategic Program
Budgeting is allocating salaries and other overhead to know the true profitability of its products
and services. This concept is a best practice in program budgeting. It is achieved through
conducting a systematic study of allocation of staff time to program categories, then applying the
calculated prorated share of overhead expense to the programs identified.
Branding - CORRECT ANSWER - Branding is a marketing process based in the concept
of singularity. It creates in the mind of the prospect the perception that there is no product on the
market quite like yours. The power of a brand is its ability to influence purchasing behavior.
Branding incorporates a singular look, feel and message in building a belief about your
association and its products.
Audit: Clean Audit vs. Unqualified - CORRECT ANSWER - Audit Clean - A clean
opinion provides the highest level of assurance that the Statement of Financial Position fairly
presents the organization's financial position; the Statement of Activities fairly presents the
results of the organization's operations; and the Statement of Cash Flows fairly presents its cash
flows. Unqualified - An unqualified opinion provides the highest level of assurance that an audit
can provide with attention given to a particular matter and provides for disclosure of additional
financial statements provided or draws attention to an additional important matter.
Accounting Practice: Segregation of Duties - CORRECT ANSWER - No individual
should control all four aspects of any financial transaction: Initiation (check requests);
Authorization (approval to pay); Asset custody (keeping the checkbook); Recording the
transaction (posting)
Financial Controls: Segregation of Duties - CORRECT ANSWER - Management is
responsible for the organization's financial reports and the information contained within; the
auditor's role is to verify the amounts included in the reports. In its fiduciary responsibility, it is
the Board's job to hire the external auditor and receive the report; it is a conflict of interest for the
CSE or CFO to hire the auditor. Financial records must agree with the financial report certified
by the auditor; any changes the auditor deems necessary are subject to acceptance by
,management. Sarbanes-Oxley has created regulatory requirements for corporations related to the
audit function.
Financial Controls: Sarbanes-Oxley - CORRECT ANSWER - Sarbanes-Oxley requires
compliance with a comprehensive reform of accounting procedures to promote and improve the
quality and transparency of financial reporting internally and externally. While the initial law
applies to publicly held corporations, many of the requirements are being practiced in the non-
profit community in expectation of expansion of the law's outreach. Sarbanes-Oxley requires
establishment of an audit committee and: -Requires the audit committee to have a financial
expert as a member -Requires the audit committee to hire the auditor -Requires five-year audit
partner rotation -Requires audit committees to establish procedures for processing whistle blower
complaints by employees -Requires a code of ethics for financial officers -Increases penalties for
document destruction or alteration -Requires certifications by the CEO and the chief financial
officer regarding the financial condition of the company and internal controls. Nonprofit
recommendations include: -A code of ethics for the board of directors -Regular board training -
Regular board self-evaluations -Audit committee members who are financially literate.
Financial Controls: Annual Audit - CORRECT ANSWER - No individual should control
all essential aspects of any transaction: initiation, authorization, asset custody and recording.
Segregation is the heart of any internal control system. Other steps include: a well-designed
record keeping and information system, a sound budgetary process, and an independent audit.
Financial Controls: Factors essential - CORRECT ANSWER - Four factors essential to
good internal financial controls: 1. Clear lines of authority; 2. Clear definition and acceptance of
responsibility; 3. Authority commensurate with responsibility; 4. Proper training.
Financial Statements: Management Letter - CORRECT ANSWER - Is issued by an
independent auditor. The Management Letter communicates those areas that management needs
to address in order to come into compliance with GAAP accounting practices.
Financial Statements: Combined Cash & Accrual Statement - CORRECT ANSWER - In a
combined statement, certain transactions are recorded on an accrual basis and others are recorded
on a cash basis. Usually, unpaid bills are recorded on accrual and uncollected income is recorded
on the cash basis. Many organizations keep books on the cash basis and convert them to accrual
at the end of the month for accounting purposes.
,Financial projections - CORRECT ANSWER - Financial projections forecast future
financial results. Usually presented in a "pro-forma" statement, financial projections are
generally speculative and investors are cautioned to recognize the projections are not guarantees
of performance. Sound financial projections should be based on credible assumptions, a
conservative projection of revenue and an aggressive projection of expenses.
Financial Key Indicators - CORRECT ANSWER - Selected by leaders, they are
quantitative measurements of strategic importance that will indicate a fairly accurate picture of
the organization in relation to its strategic plan. Indicators might include: # of new members, %
of retained members, # of new business starts, # of organizational members participating in
programs, # of accounts
Financial Terms: Classes of Funds - Restricted, Unrestricted & Temp Restricted - CORRECT
ANSWER - There are three classes of funds in a 501(c)3 organization: unrestricted,
temporarily restricted (as to time and/or purpose), and permanently restricted. Unrestricted funds
are funds which can be used at the discretion of the management within the range of uses
defined. Temporarily restricted net assets result from contributions of assets when use by the
organization is limited by donor-imposed stipulations that either expire or can be fulfilled and
removed by actions of the organization. These assets are shown on the Statement of Financial
Position. These assets are also reported on the 990 Long Form. Permanently restricted net assets
result from contributions where the donor has stipulated a specific use that do not expire with
time and cannot be shifted by the organization. "Endowments" are one common type of
permanently restricted net assets.
Financial Terms: Association Reserves - CORRECT ANSWER - Net assets minus net
liabilities. This is the "surplus" or "rainy day" fund for an association. Reserves are usually
protected by the board. Some organizations budget to contribute to the reserve fund annually;
others contribute if they have extra cash at the end of the year.
Financial Terms: Accrual vs. Cash Accounting - CORRECT ANSWER - Accrual-basis
accounting recognizes revenues when earned and expenses when incurred. Cash-basis
accounting recognizes revenue when cash is received and expenses when cash is expended. Best
practice in association accounting is to use accrual accounting; allocating dues when earned
monthly, rather than recording a lump sum when received. Accrual accounting gives a much
better financial picture and cash flow projection than cash accounting.
, Financial Terms: Chart of Accounts - CORRECT ANSWER - A system for organizing
financial data, a listing of all the line item accounts being used by the organization. Numbers are
assigned to each account to facilitate account identification. Accurate and appropriate entry into
proper accounts is key to sound financial management and reporting.
Financial Terms: Capital Budget - CORRECT ANSWER - The financial plan for long-
term expenditures such as land, buildings or equipment, including depreciation.
Financial Statements: Statement of Financial Position - CORRECT ANSWER - The
Statement of Financial Position was formerly known as the Balance Sheet. It summarizes
financial makeup of the organization at a point in time. It reflects: the assets owned by the
organization, the liabilities owed by the organization, and the residual net assets (representing net
worth.)
Financial Statements: Statement of Activities - CORRECT ANSWER - The Statement of
Activities was previously called the Statement of Revenue and Expenses or the Profit/Loss
Statement. It shows the organization's financial activity by the month and on a year-to-date basis.
It reports: revenue generated, expenses incurred, and results in net income or net loss.
Financial Statements: Reporting capital gains - CORRECT ANSWER - Capital gains or
losses should be reported in the unrestricted class. There are two exceptions to the rule. Gains
must be reported in the restricted class if: 1) there are explicit donor restrictions on the gains; 2)
applicable state law is judged by the organization's governing board to require the retention of
some or all of the capital gains/losses in the restricted class.
Financial Terms: Net Assets - CORRECT ANSWER - Residual value of the association
after liabilities have been paid. Contains three classes of assets: unrestricted net assets,
temporarily restricted net assets, and permanently restricted net assets.
Financial Terms: Financial Ratios - CORRECT ANSWER - Liquidity ratio measures the
organization's ability to pay its short-term obligations. Current ratio measured current assets
divided by current liabilities. Profitability ratio measures the profits (losses) over a specified
period of time. Coverage ratio measures the projections for the interest and principal payments to
long-term creditors and investors. Activity ratio measures the resources required to carry out
certain activities and are sometimes referred to as efficiency ratios.
