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Flashcards in Not-for-Profit Accounting Deck (95):
1

The primary standards-setting body for a public museum that receives the majority of its funding from local property taxes is the

  1. American Institute of CPAs (AICPA).
  2. Financial Accounting Standards Board (FASB).
  3. Government Accountability Office (GAO).
  4. Governmental Accounting Standards Board (GASB).

Governmental Accounting Standards Board (GASB).

A museum that receives the majority of its funding from property taxes is most likely a part of a city government and will be subject to accounting and reporting standards established by the Governmental Accounting Standards Board (GASB).

2

All the following are characteristics of not-for-profit organizations that distinguish them from business organizations except

  1. The ability to impose taxes on citizens.
  2. Contributions by resource providers who do not expect a return on investment.
  3. Operating purposes other than to earn a profit.
  4. Absence of ownership interests.

The ability to impose taxes on citizens.

The ability to impose taxes is a unique characteristic of governmental entities. Not-for-profit entities do not have the ability to impose taxes.

3

Nongovernmental not-for-profit organizations are required to report their financial statements on

  1. A current financial resources measurement focus.
  2. An economic resources measurement focus.
  3. A cash measurement focus.
  4. None of the above.

An economic resources measurement focus.

Nongovernmental not-for-profit organizations use full accrual accounting and the flow of economic resources measurement focus.

4

Other not-for-profit organizations include

  1. Hospitals.
  2. Colleges and universities.
  3. Religious organizations.
  4. Voluntary health and welfare organizations.

Religious organizations.

There are four broad categories of not-for-profit entities:

  1. hospitals and other healthcare entities,
  2. colleges and universities,
  3. voluntary health and welfare organizations, and
  4. other not-for-profit organizations. Other not-for-profit organizations include religious organizations.

5

Nongovernmental not-for profit organizations that wish to follow generally accepted accounting principles in the preparation of their financial statements should follow

  1. FASB standards.
  2. GASB standards.
  3. Both FASB and GASB standards.
  4. Neither FASB nor GASB standards.

FASB standards.

The Financial Accounting Standards Board (FASB) sets accounting standards for not-for-profit and for-profit organizations.

6

Fenn Museum, a nongovernmental not-for-profit organization, had the following balances in its Statement of Functional Expenses:

  • Education $300,000
  • Fund-raising $250,000
  • Management and general $200,000
  • Research $50,000

What amount should Fenn report as expenses for support services?

  1. $350,000
  2. $450,000
  3. $500,000
  4. $800,000

$450,000

Support services for not-for-profit organizations include the following: management, general administration, fund-raising, and membership development. In this case, support services total $450,000.

7

Nongovernmental not-for-profit organizations are required to provide which of the following external financial statements?

  1. Statement of Financial Position, Statement of Activities, Statement of Cash Flows
  2. Statement of Financial Position, Statement of Comprehensive Income, Statement of Cash Flows
  3. Statement of Comprehensive Income, Statement of Cash Flows, Statement of Gains and Losses
  4. Statement of Cash Flows, Statement of Comprehensive Income, Statement of Unrelated Business Income

Statement of Financial Position, Statement of Activities, Statement of Cash Flows

The three required statements are the Statement of Financial Position, Statement of Activities, and Statement of Cash Flows. Note that a voluntary health and welfare organization also must report a Statement of Functional Expenses.

8

How should operating expenses for a nongovernmental not-for-profit organization be reported?

  1. Change in temporarily restricted net assets
  2. Change in unrestricted net assets
  3. Change in permanently restricted net assets
  4. Contra account to associated revenues

Change in unrestricted net assets

According to FASB Statement No. 11, a nongovernmental not-for-profit organization reports operating expenses only in the Changes in Unrestricted Net Assets section of the Statement of Activities. The Changes in Temporarily Restricted Net Assets section and Changes in Permanently Restricted Net Assets section do not include expense items. Both of these sections can include revenues (support), gain or loss on the investment of donor-restricted resources, and net assets released from restrictions.

9

A nongovernmental not-for-profit organization borrowed $5,000, which it used to purchase a truck. In which section of the organization's Statement of Cash Flows should the transaction be reported?

  1. In cash inflow and cash outflow from investing activities
  2. In cash inflow and cash outflow from financing activities
  3. In cash inflow from financing activities and cash outflow from investing activities
  4. In cash inflow from operating activities and cash outflow from investing activities

In cash inflow from financing activities and cash outflow from investing activities

The structure of the Statement of Cash Flows for a not-for-profit organization is identical to that of a for-profit organization: debt proceeds are reported as cash inflows under financing activities, and purchases of capital assets are reported as cash outflows under investing activities.

10

A voluntary health and welfare organization received a $700,000 permanent endowment during the year. The donor stipulated that the income and investment appreciation be used to maintain its senior center. The endowment fund reported a net investment appreciation of $80,000 and investment income of $50,000. The organization spent $60,000 to maintain its senior center during the year.

What amount of change in temporarily restricted net assets should the organization report?

  1. $50,000
  2. $70,000
  3. $130,000
  4. $770,000

$70,000

Because of the donor stipulation, both the investment income and appreciation can be expended. Recognition of these resources increases temporarily restricted net assets by $130,000. The expenditure of $60,000 to maintain the senior center effectively reduces temporarily restricted net assets. The expenses themselves are paid out of unrestricted net assets; however, $60,000 of temporarily restricted net assets are released from restriction because of the payment, thus increasing unrestricted net assets and decreasing temporarily restricted net assets.

11

A not-for-profit voluntary health and welfare organization should report a contribution for the construction of a new building as cash flows from which of the following in the Statement of Cash Flows?

  1. Operating Activities
  2. Financing Activities
  3. Capital Financing Activities
  4. Investing Activities

Financing Activities

The Financing Activities section includes contributions and investment revenues restricted for long-term purposes (e.g., restrictions for acquisition of capital assets, endowments) and debt-related activities (debt proceeds, repayments, lease payments, etc.).

Statement of Cash Flows. In general, the FASB rules for cash flow statements, required by FASB Statement 95, apply to not-for-profit organizations. Note that GASB rules, illustrated in Module 19, do not apply. The only major difference is that cash receipts for contributions restricted for long-term purposes are classified as financing activities.

12

An unrestricted cash contribution should be reported in a nongovernmental not-for-profit organization's Statement of Cash Flows as an inflow from

  1. Operating Activities.
  2. Investing Activities.
  3. Financing Activities.
  4. Capital and Related Financing Activities.

Operating Activities.

Unrestricted cash contributions should be included in the Operating Activities section of the Statement of Cash Flows, along with unrestricted investment earnings, revenue restricted for operating purposes (Program Restrictions), revenue from exchange transactions, and operating expenditures (salaries, supplies, interest expense), including grants to other organizations

13

Birdlovers, a community foundation, incurred $5,000 in management and general expenses during 2005.

In Birdlovers' Statement of Activities for the year ending December 31, 2005, the $5,000 should be reported as

  1. A contra account offsetting revenue and support.
  2. Part of program services.
  3. Part of supporting services.
  4. A direct reduction of fund balance.

Part of supporting services.

Expenses for not-for-profit organizations fall into two broad categories:

  1. program services and 
  2. supporting services.

Expenses for program services are incurred because of the stated mission of the not-for-profit.

All other expenses fall under the supporting services classification. The $5,000 in management and general expenses should be reported as part of supporting services.

14

Which of the following financial categories are used in a nongovernmental not-for-profit organization's statement of financial position?

  1. Net assets, income, and expenses.
  2. Income, expenses, and unrestricted net assets.
  3. Assets, liabilities, and net assets.
  4. Changes in unrestricted, temporarily restricted, and permanently restricted net assets.

Assets, liabilities, and net assets.

The statement of financial position for nongovernmental not-for-profit organizations includes assets, liabilities, and net assets. "Net assets" is used rather than "retained earnings" by not-for-profits.

15

Which of the following not-for-profit entities is required to prepare a Statement of Functional Expenses?

  1. An art museum
  2. A shelter for the homeless
  3. A private foundation
  4. A public golf course

A shelter for the homeless

According to SFAS No. 117 para. 26, voluntary health and welfare organizations (VHWO) must prepare a Statement of Functional Expenses along with their other financial statements. VHWO are human service organizations that receive contributions from the public and provide health and welfare services for little or no fee to the recipients of the services. A homeless shelter is an example of a VHWO; therefore, it must prepare a Statement of Functional Expenses. The Statement of Functional Expenses is encouraged, but not required, for other types of not-for-profit. Therefore, the private foundation and the art museum (assuming it is a not-for-profit organization) have the option of presenting a Statement of Functional Expenses but are not required to do so. A public golf course is part of a governmental entity and is subject to GASB rather than FASB standards and will not present a Statement of Functional Expenses.

16

Arkin Corp. is a nongovernmental not-for-profit organization involved in research. Arkin's Statement of Functional Expenses should classify which of the following as support services?

  1. Salaries of staff researchers involved in research
  2. Salaries of fund-raisers for funds used in research
  3. Cost of equipment involved in research
  4. Cost of laboratory supplies used in research

Salaries of fund-raisers for funds used in research

The Statement of Functional Expenses requires that expenses be reported by functional classification as either (a) program related or (b) support service related. Support expenses include management, general administrative, and fund-raising expenses required to operate. Program expenses are directly related to the program or mission of the organization. The salaries of researchers, cost of equipment used in research, and cost of laboratory supplies used in research are all examples of program expenses. The salaries of fund-raisers for funds used in research are support expenses because their efforts are not directly related to conducting the research itself.

17

A nongovernmental not-for-profit organization's Statement of Activities is similar to which of the following for-profit financial statements?

  1. Balance sheet
  2. Statement of Cash Flows
  3. Statement of Retained Earnings
  4. Income statement

Income statement

Income statement. According to SFAS No. 117 para. 30(b), the Statement of Activities for not-for-profit organizations is the financial statement that is issued instead of a business entity's income statement.

18

Which of the following resources increases the temporarily restricted net assets of a nongovernmental, not-for-profit voluntary health and welfare organization?

  1. Refundable advances for purchasing playground equipment.
  2. Donor contributions to fund a resident camp program.
  3. Membership fees to fund general operations.
  4. Participants' deposits for an entity-sponsored trip.

Donor contributions to fund a resident camp program.

FASB Statement No. 117 basically provides for two kinds of temporarily restricted net assets: restricted as to (1) use or as to (2) time. This answer is correct. The donor contributions to fund a resident camp program are a example of a temporary restriction as to use. When the expenditures are made for the camp program, Temporarily-restricted Net Assets will be reduced for the amount of the expenditures ("net assets released from restrictions") and Unrestricted Net Assets will be increased by the same amount. The expenditures are recorded as expenses within unrestricted net assets. The other three possible answers all represent exchange transactions and are reported under Unrestricted Net Assets.

19

Securities donated to an NPO should be recorded at the

  1. Donor's recorded amount.
  2. Fair market value at the date of the gift or the donor's recorded amount, whichever is higher.
  3. Fair market value at the date of the gift or the donor's recorded amount, whichever is lower.
  4. Fair market value at the date of the gift.

Fair market value at the date of the gift.

Donated securities are reported at fair value at the time of donation.

20

Which of the following terms is used to indicate that a donor provided a gift with explicit instructions that the gift is to be used for a specific purpose by the not-for-profit organization but the entire amount may be spent right away?

  1. Board-designated net assets
  2. Endowment assets
  3. Permanently restricted net assets
  4. Temporarily restricted net assets

Temporarily restricted net assets

This is an example of a use restriction for which the gift will be recognized as an increase in temporarily restricted net assets at the time of the gift.

21

At which of the following amounts should a nongovernmental not-for-profit organization report investments in debt securities?

  1. Potential proceeds from liquidation sale.
  2. Discounted expected future cash flows.
  3. Quoted market prices.
  4. Historical Cost

Quoted market prices.

Unlike for-profit entities, not-for-profit entities do not break debt securities into trading, available-for-sale, and held-to-maturity categories. Following FASB Statement No. 124, not-for-profits value debt securities at fair value (quoted market price).

22

How should a nongovernmental not-for-profit organization classify gains and losses on investments purchased with permanently restricted assets?

  1. Gains may not be netted against losses in the statement of activities.
  2. Gains and losses can only be reported net of expenses in the statement of activities.
  3. Unless explicitly restricted by donor or law, gains and losses should be reported in the statement of activities as increases or decreases in unrestricted net assets.
  4. Unless explicitly restricted by donor or law, gains and losses should be reported in the statement of activities as increases or decreases in permanently restricted net assets.

Unless explicitly restricted by donor or law, gains and losses should be reported in the statement of activities as increases or decreases in unrestricted net assets.

If the donor placed restrictions on the use of gains (purpose or time restrictions), the gains are temporarily restricted until the restriction is met. If there are no restrictions, the gains and losses are unrestricted. Revenues and expenses must be reported should be reported separately but gains and losses may be reported net.

23

During the current year, Mill Foundation, a nongovernmental not-for-profit organization, received $100,000 in unrestricted contributions from the general public. Mill's board of directors stipulated that $75,000 of these contributions would be used to create an endowment. At the end of the current year, how should Mill report the $75,000 in the Net Assets section of the Statement of Financial Position?

  1. Permanently restricted
  2. Unrestricted
  3. Temporarily restricted
  4. Donor restricted

Unrestricted

Restrictions placed on resources by the board of directors constitute internal, revocable restrictions on assets and are not sufficient to cause the resources to be reported in Temporarily Restricted or Permanently Restricted Net Assets.

24

Investments in equity securities that have a readily determinable market value and all debt securities of a not-for-profit organization are reported at

  1. The lower of cost or market.
  2. Amortized cost.
  3. Fair value.
  4. Cost

Fair value.

According to FASB Statement No. 124, not-for-profit organizations report their investment in debt securities and equity securities at fair value.

25

Super Seniors is a not-for-profit organization that provides services to senior citizens.

Super employs a full-time staff of 10 people at an annual cost of $150,000. In addition, two volunteers work as part-time secretaries replacing last year's full-time secretary who earned $10,000. Services performed by other volunteers for special events had an estimated value of $15,000.

These volunteers were employees of local businesses and received small-value items for their participation.

What amount should Super report for salary and wage expenses related to the above items?

  1. $150,000
  2. $160,000
  3. $165,000
  4. $175,000

$160,000

The $150,000 that is paid to the full-time staff should be included in salary and wage expenses. The two volunteers who are replacing a full-time secretary are providing specialized secretarial skills that would have been purchased if not donated; therefore, the criteria for recognizing donated services set by FASB Statement No. 116 are met.

The $10,000 should be included in salary and wage expenses. The entry to record these donated services would be the following:

  • Expenses - salary and wages 10,000
    • Revenues - contributions 10,000

The $15,000 of services provided by the other volunteers does not meet the criteria for revenue recognition under FASB Statement No. 116. This amount should not be included in salary and wage expenses. The total amount that should be reported as wage and salary expenses is $150,000 + $10,000 = $160,000.

26

The League, a not-for-profit organization, received the following pledges:

  • Unrestricted $200,000
  • Restricted for capital additions $150,000

All pledges are legally enforceable; however, the League's experience indicates that 10% of all pledges prove to be uncollectible. What amount should the League report as pledges receivable, net of any required allowance account?

  1. $135,000
  2. $180,000
  3. $315,000
  4. $350,000

$315,000

The League should record its pledges receivable at net realizable value based on prior experience. Even though all the pledges are legally enforceable, past experience indicates that 10% of all pledges are not realized. The League should report $315,000 as net pledges receivable, based on the following computation:

  • Total Pledges Receivable $350,000
  • Estimated uncollectibles ($350,000 x 10%) 35,000
  • Net pledges receivable $315,000

27

Whitestone, a nongovernmental not-for-profit organization, received a contribution in December year 1. The donor restricted use of the contribution until March year 2. How should Whitestone record the contribution?

  1. Footnote the contribution in year 1 and record as income when it becomes available in year 2.
  2. No entry is required in year 1 and record as income in year 2 when it becomes available.
  3. Report as income in year 1.
  4. Report as deferred income in year 1.

Report as income in year 1.

The contribution has a time restriction and will be recognized contribution revenue in the temporarily restricted net asset category for year 1. When the time restriction is met in year 2, the amount will be recorded as a decrease in temporarily restricted net assets and as an increase in unrestricted net assets - essentially a reclassification of net assets.

28

A nongovernmental not-for-profit animal shelter receives contributed services from the following individuals valued at their normal billing rate:

  • Veterinarian provides volunteer animal care $8,000
  • Board members volunteer to prepare books for audit $4,500
  • Registered nurse volunteers as receptionist $3,000
  • Teacher provides volunteer dog walking $2,000

What amount should the shelter record as contribution revenue?

  1. $8,000
  2. $11,000
  3. $12,500
  4. $14,500

$12,500

Three conditions must exist in order for donated services to be recognized as contributions: (1) the services require specialized skills, (2) the persons providing the services possess those skills, and (3) the services would have been purchased if they had not been donated. Those conditions appear to apply in the case of the animal care and preparing the books for audit (assuming the board members are competent to do so, which is highly likely). The other two services (receptionist and dog walker) do not meet the conditions.

29

During the current year, a voluntary health and welfare organization receives $300,000 in unrestricted pledges. Of this amount, $100,000 has been designated by donors for use next year to support operations.

If 15% of the unrestricted pledges are expected to be uncollectible, what amount of unrestricted support should the organization recognize in its current-year financial statements?

  1. $300,000
  2. $270,000
  3. $200,000
  4. $170,000

$170,000

The $300,000 pledge amount must first be reduced by the $100,000 of pledges subject to time restrictions (e.g., cannot be used until next year) and then further reduced by the estimated $30,000 of uncollectible pledges ($200,000 x 15%).

Journal Entry:

  • Pledges Receivable $300,000
    • Allowance for Uncollectible Pledges 15% x 200,000 = $30,000
    • Revenue, Unrestricted $170,000
    • Revenue, Temporarily Restricted $100,000

30

Janna Association, a nongovernmental not-for-profit organization, received a cash gift with the stipulation that the principal be held for at least 20 years.

How should the cash gift be recorded?

  1. A temporarily restricted asset
  2. A permanently restricted asset
  3. An unrestricted asset
  4. A temporary liability

A temporarily restricted asset

Since the resources must be retained for 20 years, they must be reported under a restricted classification of net assets. However, because they are not permanently restricted but may ultimately be expended, they should be recorded as a temporarily restricted asset rather than a permanently restricted asset.

31

Community Enhancers, a nongovernmental not-for-profit organization, received the following pledges:

  • Unrestricted $400,000
  • Restricted for capital additions $300,000

All pledges are legally enforceable. However, Community's experience indicates that 5% of all pledges prove to be uncollectible.

What amount should Community report as pledges receivable, net of any required allowance account?

  1. $700,000
  2. $665,000
  3. $380,000
  4. $285,000

$665,000

Pledges receivable of $700,000 must be reported net of the allowance for uncollectible pledges (5% x $700,000 = $35,000).

Journal Entry:

  • Pledges Receivable $700,000
    • Allowance for Uncollectible Pledges 5%x700,000 = $35,000
    • Contributions Revenue (plug) $665,000

In the Statement of Net Assets:

Assets

  • Pledges Receivable700,000
  • - Allowance for Uncollectible Pledges 35,000
  • Net Collectible Pledges665,000

32

During the current year, the local humane society, a nongovernmental not-for-profit organization, received a $100,000 permanent endowment from Cobb. Cobb stipulated that the income must be used to care for older horses that can no longer race. The endowment reported income of $8,000 in the current year. What amount of unrestricted contribution revenue should the humane society report for the current year?

  1. $108,000
  2. $100,000
  3. $8,000
  4. $0

$0

The $100,000 endowed is recognized as contribution revenue in the permanently restricted net asset category. The $8,000 current year earnings on the endowment are recognized in the temporarily restricted net asset category because there is a purpose (use) restriction. As expenses related to the care for older horses occur, an amount equal to those expenses will be reclassified (i.e., "released") from temporarily restricted net assets to unrestricted net assets to offset the expenses.

33

On January 1, Read, a nongovernmental not-for-profit organization, received $20,000 and an unconditional pledge of $20,000 for each of the next four calendar years to be paid on the first day of each year. The present value of an ordinary annuity for four years at a constant interest rate of 8% is 3.312. What amount of restricted net assets is reported in the year the pledge was received?

  1. $ 66,240
  2. $ 80,000
  3. $ 86,240
  4. $100,000

$66,240

The $20,000 received on January 1 is a contribution in that year and is an increase in unrestricted net assets. The pledge in the next four years is a temporary restricted net asset as to time and is recognized at the net present value ($20,000 x 3.312 = $66,240).

34

Belle, a nongovernmental not-for-profit organization, received funds during its annual campaign that were specifically pledged by the donor to another nongovernmental not-for-profit health organization. How should Belle record these funds?

  1. Increase in assets and increase in liabilities.
  2. Increase in assets and increase in revenue.
  3. Increase in assets and increase in deferred revenue.
  4. Decrease in assets and decrease in fund balance.

Increase in assets and increase in liabilities.

Belle is acting as an "intermediary" in this situation and should record the pledge as an increase in both assets and liabilities. If Belle had the ability to re-direct the donation to another party, which is referred to as "variance power," then the pledge would have been an increase in assets and revenue.

35

Which of the following types of information would be included in total net assets in the statement of financial position for a nongovernmental not-for-profit organization?

  1. Total current net assets and total other assets.
  2. Total current assets and restricted assets.
  3. Unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets.
  4. Unrestricted net assets, restricted net assets, and total current assets.

Unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets.

FASB Statement No. 117 requires three categories of net assets:

  1. unrestricted net assets,
  2. temporarily restricted net assets, and
  3. permanently restricted net assets, which is the answer given here.

36

Oz, a nongovernmental not-for-profit organization, received $50,000 from Ame Company to sponsor a play given by Oz at the local theater. Oz gave Ame 25 tickets, which generally cost $100 each. 
Ame received no other benefits.

What amount of ticket sales revenue should Oz record?

  1. $0
  2. $2,500
  3. $47,500
  4. $50,000

$2,500

Because Ame received tickets in connection with its contribution to Oz , the transaction must be treated partly as an exchange transaction and partly as a contribution. Oz must recognize Revenue equivalent to the value of the goods or services provided to Ame (25 tickets x $100 = $2,500). 

Oz and Ame must each deduct the value of the goods or services exchanged from the total amount received/contributed to arrive at the amount to be recognized as a charitable contribution ($50,000 - $2,500 = $47,500).

Journal Entry:

  • Cash $50,000
    • Ticket Sales Revenue $2,500
    • Contributions Revenue $47,500

37

Pica, a nongovernmental not-for-profit organization, received unconditional promises of $100,000 expected to be collected within 1 year. Pica received $10,000 prior to year end.
Pica anticipates collecting 90% of the contributions and has a June 30 fiscal year end.

What amount should Pica record as contribution revenue as of June 30?

  1. $10,000
  2. $80,000
  3. $90,000
  4. $100,000

$90,000

FASB Statement No. 116 requires that unconditional promises to give ("pledges") be recognized on the accrual basis net of the estimate of uncollectible pledges. 

As long as the contributions have been pledged for the current period, the receipt of cash does not impact revenue recognition. 

In this instance, the $100,000 in pledges is reduced by the estimated uncollectible pledges of $10,000 (10% x $100,000), or $90,000.

38

A nongovernmental not-for-profit organization received a $2 million gift from a donor who specified it be used to create an endowment fund that would be invested in perpetuity. The income from the fund is to be used to support a specific program in the second year and beyond. An investment purchased with the gift earned $40,000 during the first year. At the end of the first year, the fair value of the investment was $2,010,000. What is the net effect on temporarily restricted net assets at year end?

  1. $0
  2. $10,000 increase
  3. $40,000 increase
  4. $50,000 increase

$50,000 increase

The $2,000,000 gift is permanently invested and will be reported as part of permanently restricted net assets. The income is dedicated to a specific program starting in year 2. Therefore, in year 1 all the income and the change in fair value of the investment are temporarily restricted as to time, so $50,000 is temporarily restricted.

39

Which of the following contributions would not have to be reported as an asset on the Statement of Financial Position of a not-for-profit organization?

  1. Land was donated to the Friends of the Forest Society for conversion into a nature trail.
  2. The original courthouse was donated to the Historical Preservation Society, which is converting the courthouse to a museum.
  3. An art collector donated a famous oil painting to a local nongovernmental art museum for display in its exhibit hall.
  4. None of the above donated assets would have to be reported on the statement of financial position of the not-for-profit organization.

An art collector donated a famous oil painting to a local nongovernmental art museum for display in its exhibit hall.

Collections (i.e., inexhaustible fixed assets) donated to a not-for-profit organization do not need to be capitalized. Three conditions must be met: (1) the asset is held for public exhibition, education, or research rather than financial gain; (2) the asset must be protected, unencumbered, cared for, and preserved; and (3) the asset is subject to a policy that requires proceeds from sales of collection items to be used to acquire other items for the collection. Only the famous painting donated for display appears to meet these three conditions.

40

During the current year, the Finn Foundation, a nongovernmental not-for-profit organization, received a $1,000,000 permanent endowment from Chris. Chris stipulated that the income must be used to provide recreational activities for the elderly. The endowment reported income of $80,000 in the current year. What amount of permanently restricted contribution revenue should Finn report at the end of the current year?

  1. $1,080,000
  2. $1,000,000
  3. $80,000
  4. $0

$1,000,000

The $1,000,000 endowment is permanently restricted and the $80,000 is most likely temporarily restricted as to purpose.

41

Gridiron University is a private university. A successful alumnus has recently donated $1,000,000 to Gridiron for the purpose of funding a "center for the study of sports ethics." This donation is conditional upon the university raising matching funds within the next 12 months. The university administrators estimate that they have a 50% chance of raising the additional money. How should this donation be accounted for?

  1. As a temporarily restricted support.
  2. As unrestricted support.
  3. As a refundable advance.
  4. As a memorandum entry reported in the footnotes.

As a refundable advance.

Contributions are unconditional transfers, voluntarily made, nonreciprocal, and made by an entity acting other than as an owner. The donation described in this question is conditioned upon a match in which there is considerable uncertainty. Therefore, the donation should be accounted for as a refundable advance until the matching condition is met [FASB Code Section 958-605-25-13]. The first answer, temporarily restricted support, is incorrect because that is used for contribution revenue recognized that contain a use or time restriction. The second answer, unrestricted support, is incorrect because it is used to recognized unconditional and unrestricted contributions. The fourth answer, a memorandum entry, is incorrect because the $1,000,000 in cash was donated. Had the amount be pledged rather than donated, a memorandum entry would have been appropriate.

Journal Entry:

  • Cash $1,000,000
    • Refundable Advance (Liability) $1,000,000

42

How should a nongovernmental not-for-profit organization report depreciation expense in its Statement of Activities?

  1. It should not be included.
  2. It should be included as a decrease in unrestricted net assets.
  3. It should be included as an increase in temporarily restricted net assets.
  4. It should be reclassified from unrestricted net assets to temporarily restricted net assets, depending on donor-imposed restrictions on the assets.

It should be included as a decrease in unrestricted net assets.

It should be included as a decrease in unrestricted net assets. SFAS No. 93 requires depreciation of capital assets by not-for-profit organizations. Depreciation expense is allocated to programs and therefore is a decrease in unrestricted net assets. The first answer is incorrect because SFAS No. 93 requires depreciation. The third and fourth answers are incorrect choices that are based on the option for a not-for-profit organization to adopt a policy of an implied time restriction on gifts of long-term assets. The question does not indicate that the capital assets were donated, and it does not mention that such a policy was adopted. Even if those two conditions exist, the third and fourth choices are still incorrect because the implied time restriction will result in depreciation reported in unrestricted assets and a reclassification of net assets to decrease temporarily restricted net assets and to increase unrestricted net assets for an amount equal to depreciation on the donated fixed assets.

43

Lea Meditators is a not-for-profit religious organization. A storm broke glass windows in Lea's building. A member of Lea's congregation, a professional glazier, replaced the windows at no charge.

In Lea's Statement of Activities, the breakage and replacement of the windows should

  1. Not be reported.
  2. Be reported by note disclosure only.
  3. Be reported as an increase in both expenses and contributions.
  4. Be reported as an increase in both net assets and contributions.

Be reported as an increase in both expenses and contributions.

FASB Statement No. 116 requires nongovernmental not-for-profits to account for contributions received at fair value as revenues or gains, assets, decreases in liabilities, or expenses. When the contribution takes the form of donated services, it can only be recognized if the services donated require specialized skills, are provided by individuals possessing those skills, and would have been purchased if not donated.

In the case at hand, the broken windows were replaced by a professional glazier (a person who sets glass). If the glazier had not donated his services, then Lea Mediators would have hired someone to replace the broken windows. The conditions for recognizing the donated services as a contribution have been met. Lea would make the following entry, which would be reflected in the Statement of Activities.

  • Expense sxxx
    • Revenues - contributionsxxx

44

Terry, an auditor, is performing test work for a not-for-profit hospital. Listed below are components of the Statement of Operations:

  • Revenue relating to charity care $100,000
  • Bad debt expense $70,000
  • Net Assets released from restrictions and used for operations $50,000
  • Other revenue $80,000

Net Patient Service Revenue (includes revenue related to charity care)500,000

What amount would be reported as total revenues, gains, and other support on the Statement of Operations?

  1. $460,000
  2. $530,000
  3. $580,000
  4. $630,000

$460,000

Total revenues, gains, and other support on the Statement of Operations includes all Operating Revenues reported under Unrestricted Net Assets in the Statement of Activities.

This amount includes Net Patient Service Revenues (net of $100,000 Charity Care Revenues) of $400,000, Other Revenue (often called Other Operating Revenue) of $80,000, the portion of Temporarily Restricted Net Assets used for operations of $50,000 during the current period, and a reduction for bad debts of $70,000 for a total of $460,000.

45

In April year 1, Delta Hospital purchased medicines from Field Pharmaceutical Co. at a cost of $5,000. However, Field notified Delta that the invoice was being canceled and that the medicines were being donated to Delta. Delta should record this donation of medicines as

  1. A memorandum entry only.
  2. A $5,000 credit to nonoperating expenses.
  3. A $5,000 credit to operating expenses.
  4. Other operating revenue of $5,000.

Other operating revenue of $5,000.

Contributions received shall be recognized as revenues in the period received and shall be measured at fair market value. Thus, this answer is correct since the contribution of medicine is recognized as revenues.

46

For a private not-for-profit college, net assets which are reported as either temporarily restricted or permanently restricted can be expended or invested according to the wishes of

  • I.External donors and grantors.
  • II.The governing board of the college.
  • III.The president of the college.
  1. I only.
  2. II only.
  3. I, II, and III.
  4. I and II.

I only.

Net assets which are either temporarily or permanently restricted can be expended or invested only according to the wishes of the external donors or grantors who contributed the assets.

Net assets are divided into three classes: unrestricted, temporarily restricted, and permanently restricted. Fund classifications are not reported unless the information can be shown as subdivisions of the three major classes. To be restricted, resources must be restricted by donors or grantors; internally designated resources are unrestricted. Only contributed resources may be restricted.

47

During year 1, Jones Foundation received the following support:

  • A cash contribution of $875,000 to be used at the board of directors’ discretion;
  • A promise to contribute $500,000 in year 1 from a supporter who has made similar contributions in prior periods;
  • Contributed legal services with a value of $100,000, which Jones would have otherwise purchased.

At what amounts would Jones classify and record these transactions?

  • Unrestricted revenue
  • Temporarily restricted revenue

  • Unrestricted revenue - $975,000
  • Temporarily restricted revenue - $500,000

Restricted revenues are recorded only when a restriction has been placed by the donor. One type of restricted revenue is a pledge that has not been received during the year. This considered a time restriction; accordingly, the $500,000 would be considered a temporarily restricted revenue based on a time restriction. The $850,000 and the $100,000 would be considered unrestricted revenues. The $100,000 is considered contributed services and carries no restriction. Contributed services are recognized when the services received (1) create or enhance nonfinancial assets or (2) require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation. The $100,000 contribution meets the second criterion.

48

During year 1, Margaret Billingsley, a prominent art collector, donated several items in her collection to the Darrwin Museum, a private, not-for-profit organization. Ms. Billingsley stipulated that her contribution be shown to the public, that it should be preserved, and not be sold. Darrwin’s accounting policy is to capitalize all donations of art, historical treasures, and similar items. On the date of donation, what was the effect of Ms. Billingsley’s donation on Darrwin’s financial statements?

  1. Temporarily restricted net assets increased.
  2. Reclassifications caused a simultaneous increase in permanently restricted net assets and a decrease in temporarily restricted net assets.
  3. There was no effect on any class of Darrwin’s net assets.
  4. Permanently restricted net assets increased.

Permanently restricted net assets increased.

Donations of works of art for which the donor stipulated a specified purpose and which are to be preserved and not be sold, represent permanently restricted net assets. Since the museum’s policy is to capitalize all donations of art, Ms. Billingsley’s donation would be reported as an increase in permanently restricted net assets on the statement of activities.

49

Which of the following causes a reporting reclassification?

  • I.Expiration of donor-imposed conditions.
  • II.Expiration of donor-imposed restrictions.

  • I.Expiration of donor-imposed conditions. - NO
  • II.Expiration of donor-imposed restrictions. - YES

Reclassifications result from expirations of donor-imposed restrictions. The donor-imposed restrictions may be time, purpose, or plant related. When a donor-imposed condition is satisfied, the conditional promise to give assets becomes unconditional, and there is an increase in the appropriate classification of net assets, depending on the restrictions placed upon the assets by the donors. However, this increase is reported as either revenue or support at the time the promise becomes unconditional.

50

Elizabeth Hospital, a nonprofit hospital affiliated with a religious group, should prepare which of the following financial statements?

  • Statement of changes in net assets
  • Statement of operations

  • Statement of changes in net assets - YES
  • Statement of operations - YES

According to the AICPA Audit and Accounting Guide, Health Care Organizations, the basic financial statements for a hospital include a balance sheet, a statement of operations, a statement of changes in net assets, and a statement of cash flows. Accordingly, Elizabeth Hospital should prepare both a statement of changes in net assets as well as a statement of operations.

51

In the preparation of the statement of activities for a nongovernmental not-for-profit organization, all expenses are reported as decreases in which of the following net position classes?

  1. Total net. 
  2. Unrestricted.
  3. Temporarily restricted.
  4. Permanently restricted.

Unrestricted.

The Statement of Activities reports revenues and expenses, on the full accrual basis. This is a consolidated statement except that interfund transactions are not eliminated, when those transactions are between governmental and business-type activities, and between the primary government and discretely presented component units. Expenses are reported by function. Revenues are also reported on the accrual basis and may be exchange revenues or nonexchange revenues. Exchange revenues are reported when goods or services are transferred for payment of (approximately) equal value, as is true for business enterprises. Nonexchange revenues are reported in accord with Section I below.

Program revenues, those that are directly associated with the functional expense categories, are deducted to arrive at the net expense or revenue. Note that program revenues include (1) charges for services, (2) operating grants and contributions, and (3) capital grants and contributions, although program revenues are not limited to the three categories. Examples of program revenue would be the fees charged for park operations under “culture and recreation,” and fines and forfeits. Charges for services are deducted from the function which creates the revenues. Grants and contributions (both operating and capital) are reported in the function to which their use is restricted. The net expense or revenue is broken out between governmental activities, business-type activities, and component units, the same as in the Statement of Net Position. General revenues are deducted from the net expenses to obtain net revenues. General revenues include all taxes levied by the reporting government and other nonexchange revenues not restricted to a particular program. After that, separate additions or deductions are made for special items, extraordinary items, and transfers (between categories). If a government had contributions to term and permanent endowments and contributions to permanent fund principal, these would also be shown after general revenues.

52

A nonprofit, private hospital should report its health care receivables at net realizable value on the balance sheet.  Which of the following allowances would be deducted from the hospital’s gross receivables from health care services to determine their net realizable value?

  • I.Allowance for uncollectible accounts.
  • II.Allowance for contractual adjustments.
  • III.Allowance for employee discounts.

ALL THREE.

According to the Audit and Accounting Guide for Health Care Entities, the net realizable value of health care receivables is determined by subtracting estimates of contractual adjustments, other adjustments, and the allowance for uncollectibles. Estimates of contractual adjustments, other adjustments, and the allowance for uncollectibles are reported in the period during which the services were provided even though the actual amounts may become known at a later date. Therefore, all three of the allowances stated in the question would be deducted from gross health care receivables to determine their net realizable value.

53

Ragg Coalition, a nongovernmental not-for-profit organization, received a gift of treasury bills. The cost to the donor was $20,000, with an additional $500 for brokerage fees that were paid by the donor prior to the transfer of the treasury bills. The treasury bills had a fair value of $15,000 at the time of the transfer. At what amount should Ragg report the treasury bills in its statement of financial position?

  1. $15,000
  2. $15,500
  3. $20,000
  4. $20,500

$15,000

Multiyear contributions receivable would be recorded at the present value of the future collections. Moneys to be collected in future years would be presumed to be temporarily restricted revenues (based on time restrictions) and then reclassified in the year of receipt. The difference between the previously recorded temporarily restricted revenue at present value amounts and the current value would be recorded as contribution revenue, not interest. All contributions are to be recorded at fair market value as of the date of the contribution.

54

During year 1, an alumnus of Smith College, a private not-for-profit college, transferred $100,000 to the college with the stipulation that it be spent for library acquisitions. However, the alumnus specified that none of the cash transferred could be spent until the college had matched the entire amount transferred with donations from other alumni by December 31, year 2. As of December 31, year 1, the college had received matching cash donations of only $5,000 from other alumni, and the college estimated that it was reasonably possible that it would not reach the goal of $100,000 by December 31, year 2. If the funds are not matched by December 31, year 2, the cash will be returned to the alumnus. On the college’s statement of financial position at December 31, year 1, the cash transfer of $100,000 would be included in the amount reported for

  1. Liabilities.
  2. Unrestricted net assets.
  3. Temporarily restricted net assets.
  4. Permanently restricted net assets.

Liabilities.

A transfer of assets with a conditional promise to contribute them shall be accounted for as a refundable advance until the conditions have been substantially met. The conditions have been substantially met when the possibility that they will not be met is remote. In this question, the chance that the condition will not be met is reasonably possible, which is a higher level of doubt than remote, and thus results in reporting the cash transfer as a liability at December 31, year 1.

55

Which of the following financial categories are used in a nongovernmental not-for-profit organization's statement of financial position?

  1. Net assets, income, and expenses.
  2. Income, expenses, and unrestricted net assets.
  3. Assets, liabilities, and net assets.
  4. Changes in unrestricted, temporarily restricted, and permanently restricted net assets.

Assets, liabilities, and net assets.

Statement of Financial Position

A Balance Sheet or Statement of Financial Position must show total assets, total liabilities, and total net assets. Net assets must be broken down between those that are unrestricted, temporarily restricted, and permanently restricted. Assets and liabilities may be classified or reported in order of liquidity and payment date. Assets restricted for long-term purposes must be reported separately from those that are not. The comparative format illustrated is optional; entities may report only balances for one year. Contributions receivable are to be reported at the present value of future receipts. Investments in securities with determinable fair values are to be reported at fair value.

56

Albert University, a private, not-for-profit university, has donor-restricted permanent endowment funds which include investments in equity securities. These equity securities all have readily determinable fair values because they are all traded on national security exchanges. Most of the equity investments represent between 1% and 3% of the common stock of the investee companies; however, a few of Albert’s investments permit the university significant influence over the operating and financing policies of the investee companies. How should Albert report these equity securities on its statement of financial position?

  • Equity securities: 1% to 3% ownership
  • Equity securities: Significant influence

  • Equity securities: 1% to 3% ownership - FAIR VALUE
  • Equity securities: Significant influence - EQUITY METHOD OF ACCOUNTING

According to SFAS 124, investments in equity securities which are accounted for under the equity method are not covered by the standard. Therefore, Albert’s investments which permit it to have significant influence over the operating and financing policies of the investee companies should be reported on the statement of financial position using the equity method. On the other hand, the investments which represent 1% to 3% ownership interests would be covered by SFAS 124. According to SFAS 124, these investments in equity securities should be reported on the statement of financial position at fair value.

57

On December 30, year 1, the Board of Trustees of Berry College, a private not-for-profit college, designated $4,000,000 of unrestricted net assets for the construction of an addition to its science building. What effect does this designation have on the college’s unrestricted and temporarily restricted net assets which are reported on the college’s statement of financial position at December 31, year 1?

  • Unrestricted net assets
  • Temporarily restricted
  • net assets

  • Unrestricted net assets - NO EFFECT
  • Temporarily restricted net assets - NO EFFECT

The designation of unrestricted net assets by the board of Berry College for the science building addition does not change the classification of the net assets which were designated. The assets designated were unrestricted before the designation, and they remain unrestricted after the designation.

Resources are divided into three classes: unrestricted, temporarily restricted, and permanently restricted. Fund classifications are not reported, unless the information can be shown as subdivisions of the three major classes. To be restricted, resources must be restricted by donors or grantors; internal designated resources are unrestricted. Only contributed resources may be restricted.

58

Which of the following would a nongovernmental not-for-profit educational institution report as program services?

  1. Publicity costs.
  2. Teacher salaries.
  3. Management salaries.
  4. Fundraising expenses.

Teacher salaries.

Expenses are to be reported by function either in the statements or in the notes. The FASB does not prescribe functional classifications but does describe functions as program and supporting. Major program classifications should be shown. Supporting activities include management and general, fund raising, and membership development. Other classifications may be included, such as operating income, but are not required, except for health care entities.

All expenses are reported as decreases in unrestricted net assets.

59

Pahn, a nongovernmental not-for-profit organization, received an unconditional pledge of $50,000. The donor stipulated that the pledge must be used in the next fiscal year. Pahn received and spent the $50,000 in the next year. For the current fiscal year, what element of Pahn's statement of financial position will increase as a result of the unconditional pledge?

  1. Cash and cash equivalents.
  2. Pledge receivables.
  3. Unrestricted support.
  4. Deferred contributions.

Pledge receivables.

  • Pledges receivable 100,000
    • Contributions—Temporarily Restricted 100,000 (revenue)

If a donor makes a contribution and indicates that the contribution should be used in a future period, that contribution would be recorded as a revenue in the temporarily restricted net asset class and then transferred to the unrestricted net asset class in the time period specified by the donor. In the absence of other information, if a pledge is made, the schedule of anticipated receipts would determine when the net assets are reclassified.

60

Mary Egbart promised Columbus College, a private, not-for-profit college, that she would provide 80% of the funds needed to construct a new performing arts center, if the college could get the remaining 20% of the funds needed from other donors by July 1, year 2. The promise was made in year 1. At December 31, year 1, the governing board of the college had received donations from other donors for approximately 15% of the cost of the new center and believed that the probability of not getting the remaining 5% of the necessary funds was remote. For the year ended December 31, year 1, Ms. Egbart’s promise would

  1. Be reported as an increase in permanently restricted net assets on the statement of activities.
  2. Not be reported on the statement of activities.
  3. Be reported as an increase in deferred support on the statement of financial position.
  4. Be reported as an increase in temporarily restricted net assets on the statement of activities.

Be reported as an increase in temporarily restricted net assets on the statement of activities.

A conditional promise to give is considered unconditional if the possibility that the condition will not be met is remote. At December 31, year 1, Ms. Egbart’s promise would be considered unconditional. This means that the college should report the funds that Ms. Egbart promised as an increase in temporarily restricted net assets on its statement of activities prepared for the year ended December 31, year 1.

61

Payne Co. prepares its statement of cash flows using the indirect method. Payne’s unamortized bond discount account decreased by $25,000 during the year. How should Payne report the change in unamortized bond discount in its statement of cash flows?

  1. As a financing cash inflow.
  2. As a financing cash outflow.
  3. As an addition to net income in the operating activities section.
  4. As a subtraction from net income in the operating activities section.

As an addition to net income in the operating activities section.

The total amount of interest expense is subtracted to arrive at net income. However, only the coupon payment is paid during the current year. The $25,000 of the discount amortized during the period represents interest expensed but not yet paid. Therefore, This answer is correct because the decrease in the discount account should be added to net income in the operating activities section of the statement of cash flows.

62

A private not-for-profit college has both regular and term endowments. On the college’s statement of financial position, how should the net assets of each type of endowment be reported?

  • Term Endowments
  • Regular Endowments

  • Term Endowments - TEMPORARILY RESTRICTED
  • Regular Endowments - PERMANENTLY RESTRICTED

The net assets of term endowments should be reported as temporarily restricted, while the net assets of regular endowments should be reported as permanently restricted. The net assets of term endowments are temporarily restricted because the donor of a term endowment stipulates that the endowment last only a specific number of years. Donors of regular endowments intend that these endowments last indefinitely; hence, the net assets are permanently restricted.

63

Which of the following financial statements of a private, nonprofit hospital reports the changes in unrestricted, temporarily restricted, and permanently restricted net assets for a time period?

  • Balance sheet
  • Statement of operations

  • Balance sheet - NO
  • Statement of operations - NO

The statement of changes in net assets reports the changes in the hospital’s unrestricted, temporarily restricted, and permanently restricted net assets for a time period. The statement of operations discloses only the changes in unrestricted net assets for a time period, while the balance sheet discloses the amounts of unrestricted, temporarily restricted, and permanently restricted net assets as of a specific date. Therefore, neither the balance sheet nor the statement of operations discloses the changes in unrestricted, temporarily restricted, and permanently restricted net assets for a time period.

64

At the beginning of the year, the Baker Fund, a nongovernmental not-for-profit corporation, received a $125,000 contribution restricted to youth activity programs. During the year, youth activities generated revenues of $89,000 and had program expenses of $95,000. What amount should Baker report as net assets released from restrictions for the current year?

  1. $0
  2. $ 6,000
  3. $95,000
  4. $125,000

$95,000

Net assets are released from restrictions "when the stipulated time has elapsed, when the stipulated purpose for which the resource was restricted has been fulfilled, or both." In this case, of the $125,000 contributed for youth activity programs, $95,000 was expended. This the amount that would be reclassified from temporarily restricted net assets to unrestricted net assets. The $89,000 revenues generated by youth activities is irrelevant. FASB requires that when both temporarily restricted and unrestricted resources are available, the presumption is that restricted resources are used first.

65

During the current year, the local humane society, a nongovernmental not-for-profit organization, received a $100,000 permanent endowment from Cobb. Cobb stipulated that the income must be used to care for older horses that can no longer race. The endowment reported income of $8,000 in the current year. What amount of unrestricted contribution revenue should the humane society report for the current year?

  1. $108,000
  2. $100,000
  3. $ 8,000
  4. $0

$0

The endowment and the income from the fund are both restricted.

66

For the year 1 fall semester, Brook University assessed its students $4,000,000 (net of refunds), covering tuition and fees for educational and general purposes. However, only $3,700,000 was expected to be realized because tuition remissions of $80,000 were allowed to faculty members’ children attending Brook and scholarships totaling $220,000 were granted to students who were not required to perform services for the student aid. What amount should Brook include in educational and general current funds revenues from student tuition and fees?

  1. $4,000,000
  2. $3,920,000
  3. $3,780,000
  4. $3,700,000

$3,780,000

Scholarships, for which no services are required, are to be recorded as a reduction in revenue. Tuition remissions for faculty children are considered expenses (compensation).

67

How should a nongovernmental not-for-profit organization report depreciation expense in its statement of activities?

  • It should not be included.
  • It should be included as a decrease in unrestricted net assets.
  • It should be included as an increase in temporarily restricted net assets.
  • It should be reclassified from unrestricted net assets to temporarily restricted net assets, depending on donor-imposed restrictions on the assets.

It should be included as a decrease in unrestricted net assets.

 

68

Which of the following statements is(are) correct about charity care provided by a nonprofit,
nongovernmental hospital?

  • I.Charity care represents health care services that are provided but are never expected to result in cash flows.
  • II.Bad debts expense should include a provision for charity care.
  1. I only.
  2. II only.
  3. I and II.
  4. Neither I nor II.

I only.

According to the Auditing and Accounting Guide for Health Care Entities, charity care represents health care services that are provided but are never expected to result in cash flows. As a result, charity care does not qualify for recognition as receivables or revenue in the financial statements. Since charity care does not result in the recognition of receivables, there is no need to estimate uncollectible accounts. Accordingly, bad debts expense does not include an amount related to charity care.

69

A statement of functional expenses is required for which one of the following private nonprofit organizations?

  1. Colleges.
  2. Hospitals.
  3. Voluntary health and welfare organizations.
  4. Performing arts organizations.

Voluntary health and welfare organizations.

A statement of functional expenses is required for voluntary health and welfare organizations. Other private nonprofit organizations are encouraged to disclose this information, but they are not required to.

70

A private not-for-profit hospital had the following cash flows for the year ended December 31, year 1:

  • Cash received from MediCader Insurance for patient services rendered $80,000
  • Cash received as unrestricted interest revenue $30,000
  • Cash received for permanent investment $50,000

What amount from the above cash flows should be reported as financing activities on the hospital’s statement of cash flows?

  1. $155,000
  2. $ 80,000
  3. $ 50,000
  4. $125,000

$50,000

The hospital should report the cash received from the insurance company, the cash received from the intern program, and the cash received from interest as operating activities. Cash received for permanent investment should be reported as a financing activity on the statement of cash flows. Thus, this answer is correct since only permanent investment is a financing activity.

71

The board of trustees of Blue College, a private not-for-profit college, established a $500,000 quasi endowment on September 1, year 1. On the college’s statement of financial position at December 31, year 1, the assets in this quasi endowment should be included in which of the following classifications?

  1. Temporarily restricted net assets.
  2. Unrestricted net assets.
  3. Permanently restricted net assets.
  4. Either temporarily or permanently restricted net assets, depending on the expected term of the quasi endowment.

Unrestricted net assets.

Quasi endowment funds are established by the governing board of an organization using unrestricted net assets. The governing board decides to set funds aside as permanent investments, never to be spent. Therefore, the assets in the quasi endowment would be included in the unrestricted net assets category.

72

For a private, not-for-profit organization, when is a donor’s conditional promise to give considered to be unconditional?

  1. Only when the condition is met.
  2. When the possibility that the condition will not be met is remote.
  3. When the conditional promise is made.
  4. When the cash or other assets promised are received.

When the possibility that the condition will not be met is remote.

Conditional promises to give, which depend on the occurrence of a specified future and uncertain event to bind the promisor, shall be recognized when the conditions on which they depend are substantially met, that is, when the conditional promise becomes unconditional. A conditional promise to give is considered unconditional if the possibility that the condition will not be met is remote. For example, a stipulation that an annual report must be provided by the donee to receive subsequent annual payments on a multiyear promise is not a condition if the possibility of not meeting that administrative requirement is remote. A transfer of assets with a conditional promise to contribute them shall be account for as a refundable advance until the conditions have been substantially met.

73

Which of the following transactions would result in an increase in unrestricted net assets for the year ended December 31, year 1?

  • I.A private, not-for-profit hospital earned interest on investments which were board-designated.
  • II.A voluntary health and welfare organization received unconditional promises to give (pledges) which will not be received until the beginning of year 2.

The donors placed no restrictions on their donations.

  • Both I and II.
  • I only.
  • II only.
  • Neither I nor II.

I only.

Interest earned on board-designated investments is reported as unrestricted revenue. When the governing board of a not-for-profit organization places designations on assets, they are designating the use of unrestricted net assets. Therefore, income earned on board-designated investments represents an increase in unrestricted net assets.

Unconditional promises to give are reported in the period the pledges are made, not in the period of cash collection. However, since the contributions will not be received until year 2, the contributions should be reported as an increase in temporarily restricted net assets on the statement of activities for year 1 because of this time restriction.

74

On December 31, year 1, Hope Haven, a voluntary health and welfare organization, received a pledge from a donor who stipulated that $1,000 would be given to the organization each year for the next 5 years, starting on December 31, year 2.  Present value factors at 6% for 5 periods are presented below.

  • Present value of an ordinary annuity for 5 periods at 6% 4.21236
  • Present value of an annuity due for 5 periods at 6% 4.46511

For the year ended December 31, year 1, Hope Haven should report, on its statement of activities,

  • Unrestricted revenues of $5,000.
  • Temporarily restricted revenues of $4,465.
  • Unrestricted revenues of $4,465.
  • Temporarily restricted revenues of $4,212.

Temporarily restricted revenues of $4,212.

A multiyear pledge should be reported at its present value. If there is a time restriction on the pledge, the pledge should be reported as a temporarily restricted revenue in the year the pledge is given. In Hope Haven’s situation, the pledge should be reported as temporarily restricted revenue in year 1. The pledge should be reported at its present value. This amount is calculated by using the present value of an ordinary annuity factor for 5 periods at 6%—$1,000 × 4.21236 = $4,212 rounded.

Unconditional contributions receivable (pledges) are recorded as revenues. Multiyear contributions receivable would be recorded at the present value of the future collections. Moneys to be collected in future years would be presumed to be temporarily restricted revenues (based on time restrictions) and then reclassified in the year of receipt. The difference between the previously recorded temporarily restricted revenue at present value amounts and the current value would be recorded as contribution revenue, not interest. All contributions are to be recorded at fair market value as of the date of the contribution.

75

The statement of cash flows is required for which of the following entities?

  • I.Private, not-for-profit hospital.
  • II.Private, not-for-profit college.
  • III.Governmental police station.

  • I.Private, not-for-profit hospital. - YES
  • II.Private, not-for-profit college. - YES
  • III.Governmental police station. - NO

Accounting standards require all nongovernmental entities to report a statement of cash flows. Thus, this answer is correct since I and II are both nongovernmental entities.

a.The standards apply to all nongovernmental nonprofit organizations, except those that operate for the direct economic benefit of members (such as mutual insurance companies). General FASB standards, unless specifically prohibited by those standards or do not apply because of their nature (capital stock, etc.) or unless modified by these standards, are presumed to apply.

b.Statements required are (1) Statement of Financial Position, (2) Statement of Activities, and (3) Statement of Cash Flows.  Certain note disclosures are also required and others recommended. In addition, voluntary health and welfare organizations are required to report a Statement of Functional Expenses that show expenses by function and by natural classifications.

76

he governing board of Crestfallen, a voluntary health and welfare organization, acquired equity securities of BMZ Company at a cost of $35,000 on May 1, year 1. The governing board used unrestricted net assets to acquire this investment, and it intends to use the income from its investment in BMZ, as well as other investments, to acquire much needed computer equipment for the organization. The investment in the equity securities of BMZ Company, which is listed on a national stock exchange, represents less than a 1% interest in the company. On November 15, year 1, Crestfallen received $1,000 of dividends from BMZ, and the fair value of the BMZ equity securities was $42,000 on December 31, year 1. As a result of Crestfallen’s investment in BMZ Company, the statement of activities for the year ended December 31, year 1, would report an increase of

  1. $8,000 in unrestricted net assets.
  2. $8,000 in temporarily restricted net assets.
  3. $1,000 in unrestricted net assets.
  4. $7,000 in unrestricted net assets.

$8,000 in unrestricted net assets.

Investments in equity securities with readily determinable market values should be reported at fair value in the statement of financial position. In order to report BMZ’s equity securities at their market value of $42,000, a gain of $7,000 should be recognized on the statement of activities. This gain represents an increase in unrestricted net assets, since the gain is related to an investment made by the governing board with unrestricted net assets. In addition, the dividends of $1,000 would also be reported as an increase in unrestricted net assets, since the dividends were earned on unrestricted net assets. Therefore, the investment in BMZ would result in an $8,000 increase in unrestricted net assets on the statement of activities prepared for the year ended December 31, year 1.

77

On December 31, year 1, Royal Haven, a voluntary health and welfare organization, received a pledge from a donor who stipulated that $1,000 would be given to the organization each year for the next 5 years, starting on December 31, year 1. For the year ended December 31, year 1, Royal Haven should report, on its statement of activities,

  1. Temporarily restricted revenues of $5,000.
  2. $0 until the pledge is received.
  3. Temporarily restricted revenues valued at present value of an ordinary annuity for 5 periods.
  4. Temporarily restricted revenues valued at present value of an annuity due for 5 periods.

Temporarily restricted revenues valued at present value of an annuity due for 5 periods.

A multiyear pledge should be reported at its present value. The pledge is valued at present value of an annuity due since the first payment is at the beginning of the 5-year period.

78

MaryLou College, a private not-for-profit college, received the following contributions during year 1:

  • I.$25,000 from alumni for faculty research.  Only $20,000 was actually used in year 1.
  • II.$35,000 from a donor who stipulated that the donation not be spent until July of year 2.

On the statement of activities for the year ended December 31, year 1, what will be the increase in temporarily restricted net assets?

  1. $35,000
  2. $60,000
  3. $ 5,000
  4. $40,000

$40,000

Donor restricted contributions should be reported as revenue on the date received. These contributions should be reported as temporarily restricted revenues until reclassified and expended. For the year ended December 31, year 1, the $5,000 left from the alumni gift is restricted to research and $35,000 is restricted until July of year 2. Thus, this answer is correct ($35,000 + $5,000 = $40,000).

79

Terry, an auditor, is performing test work for a not-for-profit hospital. Listed below are components of the statement of operations.

  • Revenue relating to charity care $100,000
  • Bad debt provision $70,000
  • Net assets released from restrictions $50,000 used for operations 
  • Other revenue $80,000

Net patient service revenue (includes revenue related to charity care)500,000

What amount would be reported as total revenues, gains, and other support on the statement of operations?

  1. $530,000
  2. $460,000
  3. $580,000
  4. $630,000

$460,000

The amount should include the hospital revenue less the amount related to charity care and the bad debt provision, plus the net assets released from restrictions used for operations, and plus the other revenue, or $460,000 ($500,000 − $100,000 − $70,000 + $50,000 + $80,000).

  1. Patient service revenue is to be reported on the accrual basis net of adjustments for contractual and other adjustments in the operating statement.  Provisions recognizing contractual adjustments and other adjustments (for example, hospital employee discounts) are deducted from gross patient revenue to determine net patient revenue. Health care organizations that present patient service revenue without adjustment for the patient's ability to pay should present the provision for bad debts as a deduction from patient service revenue net of the allowances and discounts. It is not presented as an expense. Significant revenue under capitation agreements (revenues from third-party payors based on number of employees to be covered, etc. instead of services performed) is to be reported separately.  Note disclosure should indicate the methods of revenue recognition and description of the types and amounts of contractual adjustments.
  2. Patient service revenue does not include charity care.  Management’s policy for providing charity care and the level of charity care provided should be disclosed in the notes.
  3. “Other revenues, gains, and losses” (included in operative revenues) include items such as
  • a.Investment income
  • b.Fees from educational programs
  • c.Proceeds from sale of cafeteria meals
  • d.Proceeds from gift shop, parking lot revenue, etc.

80

Kerry College, a private not-for-profit college, received $25,000 from Ms. Mary Smith on April 30, 20X1. Ms. Smith stipulated that her contribution be used to support faculty research during the fiscal year beginning on July 1, 20X1. On July 15, 20X1, administrators of Kerry awarded research grants totaling $25,000 to several faculty in accordance with the wishes of Ms. Smith. For the year ended June 30, 20X1, Kerry College should report the $25,000 contribution as

  1. Temporarily restricted revenues on the statement of activities.
  2. Unrestricted revenue on the statement of activities.
  3. Temporarily restricted deferred revenue on the statement of activities.
  4. An increase in fund balance on the statement of financial position.

Temporarily restricted revenues on the statement of activities.

Contributions are reported as revenue in the year received even though there are donor-imposed use or time restrictions on the donation. Since Ms. Smith’s donation was use and time restricted, the donation should be reported as a temporarily restricted revenue on the statement of activities for the year ended June 30, 20X1.

81

Russell Hospital, a nonprofit hospital affiliated with a private university, provided $250,000 of charity care for patients during the year ended December 31, year 1. The hospital should report this charity care

  1. As net patient service revenue of $250,000 on the statement of operations.
  2. As net patient service revenue of $250,000 and as an operating expense of $250,000 on the statement of operations.
  3. As accounts receivable of $250,000 on the balance sheet at December 31, year 1.
  4. Only in the notes to the financial statements for year 1.

Only in the notes to the financial statements for year 1.

According to the AICPA Audit and Accounting Guide, Health Care Organizations, charity care does not qualify for recognition as receivables or revenue in the financial statements. Management’s policy for providing charity care, as well as the level of charity care provided, should be disclosed in the financial statements. Such disclosure generally is made in the notes to the financial statements and is measured based on the providers’ rates, costs, units of service, or other statistical measure.

82

On the statement of activities for a nongovernmental, not-for-profit organization, expenses should be deducted from

  1. Unrestricted revenues and other additions.
  2. Restricted revenues and other additions.
  3. Based on the classification of the source revenue.
  4. No guidance is given on this matter.

Unrestricted revenues and other additions.

All expenses are reported as decreases in unrestricted net assets on the statement of activities. Thus, expenses are deducted only from unrestricted revenues and other additions.

83

The Pel Museum is a not-for-profit organization. If Pel received a contribution of historical artifacts, it need not recognize the contribution if the artifacts are to be sold and the proceeds used to

  1. Support general museum activities.
  2. Acquire other items for collections.
  3. Repair existing collections.
  4. Purchase buildings to house collections.

Acquire other items for collections.

An entity need not recognize the contributions of works of art and historical artifacts if the collection is held for public exhibition rather than financial profit, cared for and preserved, and, if sold, the proceeds are used to acquire other items for collections.

84

Arkin Corp. is a nongovernmental not-for-profit organization involved in research. Arkin’s statement of functional expenses should classify which of the following as support services?

  1. Salaries of staff researchers involved in research.
  2. Salaries of fund-raisers for funds used in research.
  3. Costs of equipment involved in research.
  4. Costs of laboratory supplies used in research.

Salaries of fund-raisers for funds used in research.

Fund-raising would be a support activity. The other expenses would be related to the organization’s primary activities.

85

In year 2, the Nord Association, a nongovernmental not-for-profit organization, received a $100,000 contribution to fund scholarships for medical students. The donor stipulated that only the interest earned on the contribution be used for the scholarships. Interest earned in year 2 of $15,000 was used to award scholarships in year 3. What amount should Nord report as temporarily restricted net assets at the end of year 2?

  1. $115,000
  2. $100,000
  3. $15,000
  4. $0

$15,000

The amount of temporarily restricted net assets is the amount of the earnings that cannot be spent until year 3.

Temporarily restricted resources include unexpended resources that are to be used for a particular purpose, at a time in the future, or are to be invested for a period of time (a term endowment). Temporarily restricted resources might also be used for the acquisition or receipt of a gift of plant and would represent the undepreciated amount. As the plant is depreciated, the amount depreciated would be reclassified from temporarily restricted net assets to unrestricted net assets and shown as a deduction from unrestricted revenues, gains, and other support on the statement of activities. Alternatively, plant may be initially recorded as unrestricted.

Unrestricted resources include all other resources including unrestricted contributions, the net amount from providing services, unrestricted income from investments, etc. Resources are presumed to be unrestricted, unless evidence exists that donor-imposed restrictions exist. As mentioned above, undepreciated plant may be included as unrestricted or temporarily restricted.

86

An unrestricted cash contribution should be reported in a nongovernmental not-for-profit organization’s statement of cash flows as an inflow from

  1. Operating activities.
  2. Investing activities.
  3. Financing activities.
  4. Capital and related financing activities.

Operating activities.

An unrestricted cash contribution is revenue to the organization that is presented in cash provided from operating activities.

87

Belle, a nongovernmental not-for-profit organization, received funds during its annual campaign that were specifically pledged by the donor to another nongovernmental not-for-profit health organization. How should Belle record these funds?

  1. Increase in assets and increase in liabilities.
  2. Increase in assets and increase in revenue.
  3. Increase in assets and increase in deferred revenue.
  4. Decrease in assets and decrease in fund balance.

Increase in assets and increase in liabilities.

The donation increases assets and liabilities because it is pledged to another organization.

Accounting standards require that when a not-for-profit organization (such as a foundation) is an intermediary or an agent for the transfer of assets to another not-for-profit organization, that intermediary or agent would not recognize a contribution. Unless the intermediary or agent not-for-profit organization is granted variance power to redirect the resources, or unless it is financially interrelated, the receipt of resources would be offset with the recognition of a liability to the recipient organization. If variance power exists, the recipient organization would recognize contribution revenue.

88

The governing board of Smithson Hospital, a nonprofit hospital affiliated with a religious organization, acquired 100 BMI Company bonds for $103,000 on June 30, year 1. The bonds pay interest on June 30 and December 30. On December 31, year 1, interest of $3,000 was received from BMI, and the fair value of the BMI bonds was $105,000. The governing board acquired the BMI bonds with cash which was unrestricted, and it classified the bonds as trading securities at December 31, year 1, since it intends to sell all of the bonds in January year 2. As a result of the investment in BMI bonds, what amount should be included in revenue, gains, and other support on the statement of operations for the year ended December 31, year 1?

  1. $0
  2. $3,000
  3. $2,000
  4. $5,000

$5,000

According to the AICPA Audit and Accounting Guide, Health Care Organizations, unrealized gains on trading securities should be included as part of the amount reported for revenue, gains, and other support on the statement of operations. These unrealized gains are included in the performance indicator. Likewise, unrestricted revenues from interest and dividends are included as part of the amount reported for revenue, gains, and other support on the statement of operations. Therefore, Smithson Hospital should report both the $3,000 of interest revenue and the $2,000 unrealized holding gain ($105,000 less $103,000) in the amount reported for revenue, gains, and other support on its statement of operations for the year ended December 31, year 1.

89

Tucker Hospital, a nonprofit hospital affiliated with Tucker University, received a donation of medical supplies during the year ended December 31, year 1. The supplies cost the vendor $10,000 and had a selling price of $15,000 on the date they were donated. The vendor did not place any restrictions on how the supplies were to be used. During year 1, all of the donated medical supplies were used. On the hospital’s statement of operations for the year ended December 31, year 1, how should the donation be reported?

  1. The donation should be included in both revenue and operating expenses in the amount of $10,000.
  2. The donation should be excluded from the statement of operations.
  3. The donation should be included in both revenue and operating expenses in the amount of $15,000.
  4. The donation should be included in revenue in the amount of $15,000 and in operating expenses in the amount of $10,000.

The donation should be included in both revenue and operating expenses in the amount of $15,000.

According to the AICPA Audit and Accounting Guide, Health Care Organizations, a donation of noncash assets should be reported at fair value and reported as an increase in the appropriate net asset class. If there are no donor-imposed restrictions on the donation, the donation increases unrestricted net assets on the statement of operations. More specifically, the donation is included in the amount reported for revenue, gains, and other support if the donation is used for the operations of the hospital. The use of the donation in the operations of the hospital is reported as part of the operating expenses for the period. The donation of medical supplies to Tucker Hospital should be reported as both a revenue and as an operating expense in the amount of $15,000 on the statement of operations for the year ended December 31, year 1.

90

On December 20, year 1, United Appeal, a voluntary health and welfare organization, received a donation of computer equipment valued at $25,000 from a local computer retailer. The equipment is expected to have a useful life of three years. The donor placed no restrictions on how long the computer equipment was to be used, and United has an accounting policy which does not imply a time restriction on gifts of long-lived assets. On United’s statement of activities prepared for the year ended December 31, year 1, the donation of computer equipment should be reported

  1. As an increase in temporarily restricted net assets.
  2. Only in the notes to the financial statements.
  3. As an increase in unrestricted net assets.
  4. As either an increase in temporarily restricted net assets or as an increase in unrestricted net assets.

As an increase in unrestricted net assets.

Gifts of long-lived assets should be reported as unrestricted support if the organization has an accounting policy which does not imply a time restriction on such gifts.

Note - if there was a time restriction, there would be an increase in temporarily restricted net assets.

91

Albert University, a private not-for-profit university, had the following cash inflows during the year ended June 30, year 1:

  • I.$500,000 from students for tuition.
  • II.$300,000 from a donor who stipulated that the money be invested indefinitely.
  • III.$100,000 from a donor who stipulated that the money be spent in accordance with the wishes of Albert’s governing board.

On Albert University’s statement of cash flows for the year ended June 30, year 1, what amount of these cash flows should be reported as operating activities?

  1. $900,000
  2. $400,000
  3. $800,000
  4. $600,000

$600,000

Nongovernmental not-for-profit organizations are required to report a statement of cash flows. On this statement, cash flows are reported using the classifications of operating, investing, and financing activities. Cash flows related to revenues and expenses which are unrestricted should be reported in the operating activities section. The cash inflows from both tuition ($500,000) and the unrestricted contribution ($100,000) are both unrestricted and should be reported as operating activities. Restricted contributions for long-term purposes, like the $300,000 endowment, are reported as financing activities on the statement of cash flows.

92

A statement of financial position, which reports unrestricted, temporarily restricted, and permanently restricted net assets, is required for which one of the following organizations?

  • I.A public university.
  • II.A private, not-for-profit hospital.
  1. I and II.
  2. I only.
  3. Neither I nor II.
  4. II only.

  • I.A public university. - NO
  • II.A private, not-for-profit hospital. - YES

Accounting standards require a statement of financial position which reports unrestricted, temporarily restricted, and permanently restricted net assets for nongovernmental, not-for-profit organizations. Therefore, the statement of financial position is required for a private, not-for-profit hospital, but not for a public university, which is supported by government.

93

The Turtle Society, a nongovernmental not-for-profit organization, receives numerous contributed hours from volunteers during its busy season. Chris, a clerk at the local tax collector’s office, volunteered ten hours per week for 24 weeks transferring turtle food from the port to the turtle shelter. His rate of pay at the tax office is $10 per hour, and the prevailing wage rate for laborers is $6.50 per hour. What amount of contribution revenue should Turtle Society record for this service?

  1. $0
  2. $ 840
  3. $1,560
  4. $2,400

$0

Contributed services are only recognized if they create or enhance nonfinancial assets, or require specialized skills. The services by Chris do not meet these requirements.

Contributed services, when recognized, are recognized as both revenue and expense. However, contributed services should be recognized only when the services: (1) create or enhance nonfinancial assets, or (2) require specialized skills, are provided by individuals possessing those skills, and would typically be purchased if not provided by donation.

94

Hope United, a voluntary health and welfare organization, received the following contributions in year 1:

  • I.$500 from donors who stipulated that the money not be spent until year 2.
  • II.$1,000 from donors who stipulated the contributions be used for the acquisition of equipment, none of which was acquired in year 1.

How would the above events affect the following at year-end December 31, year 1?

  • Temporarily restricted net assets
  • Revenues

  • Temporarily restricted net assets - $1,500
  • Revenues - $1,500

Contributions are reported as revenue in the year received, whether the donors place time or use restrictions on the resources. According to SFAS 117, net assets should be disclosed according to whether they are unrestricted, temporarily restricted, and permanently restricted. Both of the events listed would increase temporarily restricted net assets and revenues for the year ending December 31, year 1.

95

A $100,000 gift was received by Group Home Projects, a nongovernmental not-for-profit organization. Group's board of directors stipulated that this gift must be invested for a period of four years, with the income to be used for general operations. How should the gift be reported in Group Home's statement of activities?

  1. Unrestricted contribution.
  2. Restricted contribution.
  3. Unrestricted contribution of $25,000 and restricted contribution of $75,000.
  4. Deferred revenue.

Unrestricted contribution

Contributions, income on long-term investments, and net unrealized and realized gains on long-term Investments may increase unrestricted, temporarily restricted, and permanently restricted net assets. All of these revenue sources increase unrestricted net assets unless restricted by donors.