Area I B. NFP

Question 1

Statement of Financial Position for a nongovernmental, not-for-profit (NFP) entity in the United States serves

Answer 1

a critical role in conveying the financial health and status of the organization. Its
purpose and objectives are somewhat different from those of for-profit entities due to the unique nature of NFPs

Question 2

purpose of statement of financial position for NFP

Answer 2

Showcasing Financial Health, Resource Management, Compliance and Accountability

Question 3

objectives of statement of financial position

Answer 3

Displaying Assets, Outlining Liabilities, Net Assets Classification: Unlike for-profit entities, NFPs categorize net assets into Net Assets Without Donor Restrictions, Net Assets With Donor Restrictions, Financial Stability and Sustainability, Evaluating Financial Performance, Supporting Decision-Making, Transparency to Stakeholders

Question 4

NFP statement of financial position uses Uses “Net Assets” instead of equity, to

Answer 4

reflect the residual interest in the assets of the NFP after deducting liabilities.

Question 5

NFP board-designated funds are

Answer 5

unrestricted contributions or net assets without donor restrictions because limitations are internally imposed not by donors

Question 6

NFP Revenue from Operations

Answer 6

This includes income from activities that further the organization’s mission, such as membership fees, ticket sales for events, or revenue from services provided. These
revenues are not restricted by donors and can be used for general operations.

Question 7

net assets with donor restrictions

Answer 7

These funds are subject to restrictions imposed by donors. Restrictions can be purpose restrictions, time restrictions, or both

Question 8

endowment

Answer 8

These are donations intended to be maintained permanently or for a specified duration, with only the income or interest earned to be used for operations or specific purposes. For example, a donor contributes $1 million to an endowment, specifying that only the investment income can be used, and only for cancer research

Question 9

in-kind contributions

Answer 9

Example: An NFP receives services from a volunteer professional (e.g., legal or accounting services) has to record this as an in-kind contribution at its fair market value

Question 10

the purpose of NFP statement of activities similar to income statement for a for-profit entity

Answer 10

Displaying Revenue and Expenses, Reflecting Operational Performance, Demonstrating Financial Health, Compliance and Accountability

Question 11

objectives of statement of activities

Answer 11

Illustrating Changes in Net Assets, Showing Revenue Sources, Detailing Expense Allocation: Expenses are detailed by function (such as program services, management and general, and fundraising) to show how resources are allocated towards fulfilling the organization’s mission., Highlighting Donor Restrictions, Informing Decision Making, Public Disclosure

Question 12

FAR2D10061
What could cause a discrepancy between the subledger and general ledger balances for PPE?

A. A change in the depreciation method
B. An error in recording a purchase or disposal of an asset
C. A fluctuation in market values of PPE
D. A revision of future estimated maintenance costs

Answer 12

B. An error in recording a purchase or disposal of an asset

Question 13

FAR3G10017

How should a significant decline in the market value of a company’s investments, occurring after the balance sheet date, be treated if the investments are classified as held-for-trading?

A) Adjust the carrying value of the investments in the financial statements.
B) Create a reserve for the decline in market value.
C) No adjustment is required; only disclose in the notes.
D) Recognize an impairment loss in the income statement.

Answer 13

C) No adjustment is required; only disclose in the notes.
A significant decline in the market value of investments classified as held-for-trading, occurring after the balance sheet date, is a Type II subsequent event. It does not require an adjustment to the financial statements, as it reflects conditions that arose after the balance sheet date. However, it should be disclosed in the notes to the financial statements to inform users.

Question 14

Each of the following is a component of the changes in the net assets available for benefits of a defined benefit pension plan trust, except:

A. The net change in fair value of each significant class of investments.
B. The net change in the actuarial present value of accumulated plan benefits.
C. Contributions from the employer and participants.
D. Benefits paid to participants.

Answer 14

B. The net change in the actuarial present value of accumulated plan benefits.

The actuarial present value of accumulated plan benefits is referring to the actual benefits the plan is going to pay out, meaning it refers to the liability side of the plan. The other responses are all aspects of the plan assets.

Question 15

FAR3F10015

What does the ‘transfer of ownership’ criterion imply in lease classification?

A. It always indicates an operating lease.
B. It requires the lessee to return the asset at the end of the lease term.
C. It signifies a finance lease if ownership transfers to the lessee by the end of the lease term.
D. It refers to leases where the asset is exclusively used by the lessee.
Correct

Answer 15

FAR3F10015

C. It signifies a finance lease if ownership transfers to the lessee by the end of the lease term.

The ‘transfer of ownership’ criterion classifies a lease as a finance lease if it stipulates that ownership of the leased asset transfers to the lessee by the end of the lease term. This reflects a significant transfer of benefits and risks related to ownership.

Question 16

FAR1D10017

Which section of Form 10-Q includes the company’s financial statements?

A. Item 1 of Part I
B. Item 2 of Part I
C. Item 1 of Part II
D. Item 3 of Part I

Answer 16

A. Item 1 of Part I

In Form 10-Q, the company’s financial statements are included in Item 1 of Part I. This section presents unaudited financial statements, providing an up-to-date view of the company’s financial status.

Question 17

FAR1A40004

When a company issues new shares, how does it affect the statement of changes in equity?

A) It decreases retained earnings.
B) It increases share capital.
C) It reduces total assets.
D) It has no impact on the statement.

Answer 17

B) It increases share capital.
Issuing new shares results in an increase in share capital, reflecting the inflow of funds from shareholders in exchange for ownership in the company.
It does not decrease retained earnings (Option A) as this account reflects earnings that have been retained rather than distributed as dividends. It does not necessarily reduce total assets (Option C); instead, it changes the equity side of the balance sheet. It does have an impact (Option D), specifically on the equity section.

Question 18

FAR1A40014

If a company’s total equity at the beginning of the year was $200,000, and at the end of the year it was $250,000, and the company issued $20,000 in new stock, what was the total comprehensive income for the year?

A) $50,000
B) $30,000
C) $70,000
D) $40,000

Answer 18

B) $30,000

Total comprehensive income is the change in equity minus any new stock issued. The calculation is:
Change in equity = Ending equity – Beginning equity
Change in equity = $250,000 – $200,000 = $50,000
Total comprehensive income = Change in equity – New stock issued

Total comprehensive income = $50,000 – $20,000 = $30,000

Question 19

FAR2B10037

In reconciling trade receivables, how should a return of goods after the closing date be treated?

A) As a current period sales return
B) As an adjustment to the previous period’s revenue
C) As an increase in the current period’s receivables
D) As a decrease in the current period’s cost of goods sold

Answer 19

A) As a current period sales return

Returns after the closing date are typically recorded as sales returns in the current period. They do not adjust prior period revenue, increase current receivables, or decrease the cost of goods sold.

Question 20

FAR2A10023
When a company discovers a bank error that has resulted in an understatement of the bank statement balance, what is the correct course of action?
A. Deduct the amount of the error from the general ledger balance
B. Add the amount of the error to the general ledger balance
C. Notify the bank and wait for correction before adjusting the general ledger
D. No adjustment to the general ledger is necessary

Answer 20

C. Notify the bank and wait for correction before adjusting the general ledger

When a bank error is detected, the company should notify the bank and wait for it to correct the error (C).
Adjusting the general ledger (A or B) is not immediately necessary since the error lies with the bank, not the company’s records. Not making any adjustment (D) is correct in terms of the general ledger but the company still needs to communicate with the bank for correction.

Question 21

FAR3C10045
How should an entity recognize the amortization of capitalized contract costs?
A. Debit Contract Costs; Credit Amortization Expense
B. Debit Amortization Expense; Credit Accumulated Amortization
C. Debit Revenue; Credit Contract Costs
D. Debit Accumulated Amortization; Credit Contract Costs

Answer 21

FAR3C10045

B. Debit Amortization Expense; Credit Accumulated Amortization

The amortization of capitalized contract costs is recognized by debiting Amortization Expense and crediting Accumulated Amortization.

Question 22

FAR2J004nsim

Kolby Inc entered into an agreement with Kory Inc to sell Kory a product for $100,000. Kory paid the $100,000 in advance to Kolby. The product costs Kolby $70,000 to produce.

On the day that Kolby delivers the product to Kory and the obligation is fulfilled, what two accounts will Kolby debit?

A. Contract liability and revenue
B. Contract liability and inventory
C. Contract liability and COGS
D. Contract liability and accounts payable

Answer 22

Contract liability and COGS

When Kolby was paid the $100,000 upfront, Kolby would debit cash and credit “contract liability” for $100,000 each.

When Kolby delivers the product, Kolby would first debit contract liability for $100,000 to reverse it, and then credit revenue for the $100,000.

The second part of the entry would be to debit COGS for $70,000, and credit inventory for $70,000 to remove the product from inventory.

Question 23

FAR1F10059
In variance analysis, what does the Variable Overhead Efficiency Variance measure?

A. The efficiency in controlling variable overhead costs.
B. The difference in actual and budgeted variable overhead rates.
C. The efficiency in using materials.
D. The efficiency in using labor and other resources relative to output.

Answer 23

D. The efficiency in using labor and other resources relative to output.

The Variable Overhead Efficiency Variance measures the efficiency in using labor and other resources in relation to the output produced. It’s not about the control of overhead costs (A), the rate difference (B), or the efficiency in using materials (C), but how effectively resources are used to produce output.

Question 24

FAR3A10008
A company realizes that it overestimated its bad debt expense in the previous year. The correction of this overestimation should be:
A) Adjusted in the current year’s income statement.
B) Treated as a change in accounting estimate and applied prospectively.
C) Restated in the previous year’s financial statements.
D) Recorded directly in retained earnings.

Answer 24

C) Restated in the previous year’s financial statements.

Overestimating bad debt expense is an error. The correction of such errors should be made retrospectively by restating the financial statements of the affected prior period. This ensures that the financial statements accurately reflect the company’s financial position.

Question 25

Kenn City obtained a municipal landfill and passed a local ordinance that required the city to operate the landfill so that the costs of operating the landfill, as well as the capital costs, are to be recovered with charges to customers. Which of the following funds should Kenn City use to report the activities of the landfill?

A. Enterprise
B. Permanent
C. Special revenue
D. Internal service

Answer 25

Enterprise

When a government charges customers for a service – similar to a regular business – that activity is managed through an enterprise fund. Enterprise funds are just that: used for government services that are funded by charging external customers a fee for.

Question 26

FAR2E005n
Thomas Inc made a 30% investment in Jefferson Company. The investment gave Thomas the ability to exercise significant influence over Jefferson. If Jefferson reports net income and pays dividends during the year, how would Thomas’s accounting for the investment differ under the equity method vs making the fair value election?

A. If Thomas elects to use the fair value option, any dividends received from Jefferson would be dividend income to Thomas.
B. If Thomas elects to use the fair value option, any dividends received from Jefferson would decrease the investment account on Thomas’s books.
C. If Thomas elects to use the fair value option, Thomas’s portion of Jefferson’s net income would decrease the investment account on Thomas’s books.
D. If Thomas elects to use the fair value option, Thomas’s portion of Jefferson’s net income would increase the investment account on Thomas’s books.

Answer 26

A. If Thomas elects to use the fair value option, any dividends received from Jefferson would be dividend income to Thomas.

Under the equity method, Thomas’s portion of Jefferson’s income would increase the investment account on Thomas’s books, and dividends from Jefferson would decrease this same investment account and are not considered income.

Under the fair value method, changes in the fair value of the investment (stock price) will be reflected in income for the period, and any dividends received are included in income for the period. Thomas would not report any changes on the investment based on the results of Jefferson’s operations, like it would under the equity method.

Question 27

FAR3D10019

Which of the following does NOT influence the assessment of a valuation allowance for a deferred tax asset?

A. Recent financial performance.
B. Forecasted operating income.
C. Changes in tax laws.
D. The current interest rate environment.

Answer 27

D. The current interest rate environment.

The current interest rate environment does not directly influence the assessment of a valuation allowance for a deferred tax asset. Factors that do influence this assessment include recent financial performance, forecasted operating income, and changes in tax laws. These factors are directly related to the company’s ability to generate sufficient taxable income to realize the deferred tax assets. The interest rate environment, while important for other financial decisions, does not have a direct impact on this assessment.

Question 28

FAR2C001aicpa

Assuming constant inventory quantities, which of the following inventory-costing methods will produce a lower inventory turnover ratio in an inflationary economy?

FIFO (first in, first out)
LIFO (last in, first out)
Moving average
Weighted average

Answer 28

FIFO (first in, first out)

Inventory turnover is COGS/average inventory, so if inventory is increasing in cost during the year, FIFO would have the lowest COGS and the highest ending inventory. The highest-priced batches of inventory would make up ending inventory at the end of the year.

Question 29

FAR4A001aicpa

Encumbrances would not appear in which fund?
A. Capital projects
B. Special revenue
C. General
D. Enterprise

Answer 29

Enterprise

Encumbrances are a specific type of budget transaction used in governmental fund types. Enterprise funds – which are business type programs or transactions – don’t use encumbrance accounting.

Question 30

FAR2E10026
A company has an investment in a mutual fund, initially valued at $40,000. At year-end, its fair value is $45,000. What journal entry should be recorded?
A) Debit Mutual Fund Investment $40,000; Credit Investment Income $40,000
B) Debit Mutual Fund Investment $5,000; Credit Investment Income $5,000
C) Debit Investment Income $5,000; Credit Mutual Fund Investment $5,000
D) Debit Investment Income $45,000; Credit Mutual Fund Investment $45,000

Answer 30

B) Debit Mutual Fund Investment $5,000; Credit Investment Income $5,000

The correct entry for recognizing a $5,000 increase in fair value is a debit to Mutual Fund Investment and a credit to Investment Income.

Question 31

FAR1A20010
What is the importance of separating operating and non-operating items in an income statement?
A) It helps in calculating tax liabilities accurately.
B) It provides a clearer picture of the company’s core business performance.
C) It is primarily for compliance with international accounting standards.
D) It simplifies the calculation of gross profit.

Answer 31

B) It provides a clearer picture of the company’s core business performance.

Separating operating and non-operating items helps stakeholders understand the company’s core business performance, distinguishing it from gains or losses not directly related to primary business activities.
A) is incorrect as tax liabilities involve more considerations. C) is partly true but not the primary reason. D) is incorrect as it does not impact the calculation of gross profit.

Question 32

FAR3F10035
Under which circumstance would a lessee recognize a higher lease cost in the income statement for a lease?
A. When the lease term is shorter than the economic life of the asset.
B. When the lease payments are made at the end of each period.
C. When the residual value of the leased asset is significant.
D. When the lease includes a bargain purchase option.

Answer 32

B. When the lease payments are made at the end of each period.

Lease payments made at the end of each period result in a higher lease liability (due to the nature of discounting), leading to higher interest expense and, therefore, a higher total lease cost recognized in the income statement.

Question 33

FAR1A40009
What does a ‘revaluation surplus’ represent in the statement of changes in equity?

A) An increase in liabilities due to asset revaluation.
B) A decrease in assets due to depreciation.
C) An increase in equity due to an upward revaluation of assets.
D) The surplus of income over expenses.

Answer 33

C) An increase in equity due to an upward revaluation of assets.

A revaluation surplus arises when there is an upward revaluation of assets, leading to an increase in equity.
It does not represent an increase in liabilities (Option A) or a decrease in assets (Option B). It is also not related to the surplus of income over expenses (Option D), which would typically affect retained earnings.

Question 34

Giaconda, Inc. acquires an asset for which it will measure the fair value by discounting future cash flows of the asset. Which of the following terms best describes this fair value measurement approach?

A. Market
B. Income
C. Cost
D. Observable inputs

Answer 34

B. Income

Valuing an asset by measuring the cash flows produced by the asset would be the income approach to measuring fair value.

There are 3 valuation approaches to measure fair value:
Market approach: use prices from market transactions, such as the level 1, 2, 3 hierarchy
Cost approach: basically the current replacement cost
Income approach: converting future amounts into one current amount, such as discounted future cash flows

Question 35

FAR2E20030
How does the impairment of a financial asset measured at amortized cost affect the income statement?
A) It results in an increase in interest income.
B) It is recognized as an operating expense.
C) It is reported as a finance cost, reducing net income.
D) It has no impact on the income statement, only on the balance sheet.

Answer 35

C) It is reported as a finance cost, reducing net income.

An impairment loss on a financial asset measured at amortized cost is recognized in the income statement, typically as a finance cost, which reduces the entity’s net income.

Question 36

FAR1A10037

Why is it important to correct discrepancies on the balance sheet?
A) To ensure the balance sheet balances
B) To provide accurate information for decision-making
C) To speed up the transaction processing time
D) To comply with stock market regulations

Answer 36

B) To provide accurate information for decision-making

The primary goal of correcting discrepancies is to ensure that the balance sheet accurately reflects the company’s financial position, which is crucial for informed decision-making.
While ensuring the balance sheet balances (A) is a technical necessity, it’s not the primary reason. Speed of transaction processing (C) is unrelated, and while compliance (D) is important, it is a broader requirement beyond just correcting discrepancies.

Question 37

FAR1B20005
Which of the following best describes a temporarily restricted net asset in a not-for-profit entity’s statement of activities?
A) An asset that can only be used after a set period
B) An asset restricted for use in a specific program
C) An asset that is permanently restricted by donor
D) An asset that is restricted by the board of directors

Answer 37

B) An asset restricted for use in a specific program

Temporarily restricted net assets are those designated by donors for specific programs or purposes.

Question 38

FAR1C20006

Where would a local government record activities related to taxes collected on behalf of another government?
A. Special Revenue Fund
B. Debt Service Fund
C. Agency Fund
D. General Fund

Answer 38

C. Agency Fund

Agency Funds are used to account for assets held by a government in a trustee capacity or as an agent for individuals, private organizations, other governmental units, and/or other funds. Collecting taxes for another government is an agency activity.

Question 39

NFP reports expenses by both

Answer 39

nature and function

Question 40

NFP reports expenses in three primary ways

Answer 40

in the Statement of Activities, in the notes to the financial statements, or in a separate
Statement of Functional Expenses

Question 41

NFP expense by nature

Answer 41

based on type of cost such as salaries, rent, utilities, supplies

Question 42

NFP expense by function

Answer 42

program services (expenses directly related
to the mission of the NFP), management and general (administrative expenses), and fundraising

Question 43

Purpose of the Statement of Cash Flows for NFPs:

Answer 43

Cash Flow Overview, Financial Health Indicator, Operational Insights, Investment and Financing Analysis

Question 44

Objectives of the Statement of Cash Flows for NFPs:

Answer 44

Tracking Cash Sources and Uses, Evaluating Liquidity, Understanding Non-Cash Transactions, Decision Making Tool, Transparency and Accountability

Question 45

donations with donor restrictions for long-term use, such as for capital
projects or endowment classify as

Answer 45

cash inflow of financing activities section of the cash flow statement

Question 46

Payments for Lease Obligations: If the NFP has entered into finance lease agreements, payments made under these
leases are considered

Answer 46

cash outflow financing activities in the statement of cash flows

Question 47

Certain non-cash operating items, like depreciation or in-kind donations, are reconciled on the

Answer 47

statement of cash flows since they are included in the calculation of net income but do not affect cash.

Question 48

financing activities statement of cash flows Similar to operating and investing
activities, certain financing activities may not involve immediate cash flow, such as

Answer 48

in-kind contributions for long-term purposes, which should be disclosed in the
accompanying notes

Question 49

investing activities statement of cash flows Non-Cash Transactions: Similar to operating activities, some investing activities may involve non-cash transactions, like

Answer 49

acquiring assets through donations or exchanges, which are noted in the statement but do not appear as cash flows

Question 50

For NFP, reconcile the change in cash on the cash flow statement with

Answer 50

the change in cash reported on the statement of financial position

Question 51

NFP notes to financial statements, Disclose the NFP’s tax-exempt status and any tax-related contingencies for example

Answer 51

Confirmation of the NFP’s tax-exempt status under IRS code 501(c)(3)

Question 52

NFP notes to financial statements, Provide information about the liquidity and availability of assets to meet cash needs for general expenditures within

Answer 52

one year of the balance sheet date. This should include Qualitative information and Quantitative information taking into account both internal limits set by the board and external limits imposed by
donors, laws, and contracts

Question 53

Grants and Aid Disbursed: Cash distributed to beneficiaries or other organizations as part of the NFP’s programs is a

Answer 53

Cash Outflows from Operating Activities

Question 54

NFP building project is

Answer 54

cash outflow financing activity