1.3 Objectives of Financial Reporting by Nongovernmnental Not-for-Profit Entities

Question 1

Who are the stakeholders of NFPs?

Answer 1

• managers
• constituents
• oversight bodies
• resources providers

Question 2

What type of information do stakeholders of NFPs need?

Answer 2

information about:

• services provided
• continuing ability to provide those services

Question 3

How are the operating environments of NFPs and business entities similar? (4)

Answer 3

They Both:

• produce & distribute goods and services using scarce resources
• obtain resources from contributors and are accountable to them
• must be financially sound in the long run
• are subject to laws and regulations

Question 4

Identify the 4 distinguishing characteristics of NFPs:

Answer 4

• nonreciprocal transactions ( receive significant resources from providers who do not expect to receive repayment or proportionate economic benefits)
• operating purposes other than to provide goods or services at a profit
• no single indicator of performance or net income
• lack defined ownership interests that can be sold, transferred or redeemed or entitle an owner to distributions upon liquidation of the entity

Question 5

Are credit unions or employee benefit plans considered NFPs?

Answer 5

No - because investor owned entities that provide economic benefits directly to owners, members, or participants are NOT considered NFP entities

Question 6

How is equity reported on the balance sheet of NFPs?

Answer 6

It is not - NFPs report net assets

Question 7

Identify some entities that have some characteristics of an NFP but not others. How do these entities report financial information?

Answer 7

• private not-for-profit hospitals and schools that receive small amounts of contributions but are essentially dependent on debt issues & user fees
• reporting financial information as a business and not an NFP would be more appropriate

Question 8

Identify the 5 objectives of financial reporting for NFPs:

Answer 8

to provide information:

• useful to providers in making resource allocation decisions
• useful in assessing services and the ability to provide services
• useful in assessing management stewardship and performance
• about economic resources, obligations, net resources, and changes in them
• about managers’ explanations and interpretations to help users understand financial information

Question 9

Financial reporting for NFPs that provide information about economic resources, obligations, net resources, and changes in them, should include what 4 facts?

Answer 9

• performance of an organization during a period
• nature of, and relationship between, resource inflows and outflows
• service efforts and accomplishments
• factors that may affect an organization’s liquidity, such as sources & uses of cash and other liquid assets and borrowing and repayment activities