Exam #1 Chapters 1 & 13

Question 1

An organization is governmental if they have ONE or more of the following characteristics:

Answer 1

• Their officers are popularly elected, or a controlling majority of their governing body is appointed by government officials
• They hold the power to enforce or enact a tax levy
• They hold the power to directly issue debt whose interest is exempt from federal taxation
• They face the potential that a government might dissolve them unilaterally and assume their assets and liabilities

Question 2

Nonprofit entities:

Answer 2

• Receive contributions of significant amounts from resource providers who do NOT expect equivalent value in return
• Operate for purposes other than to provide goods and services at a profit
• Lack ownership interests like those of a business enterprise

Question 3

What is the purpose of a business?

Answer 3

To increase the owner’s wealth and consistently make a profit.

Question 4

Exchange transactions

Answer 4

Exchange transactions are transfers, each side gets something (what businesses engage in)

Question 5

Non-exchange transactions

Answer 5

Non-exchange transactions are one sided, a true donation. Donor does not expect anything in return.

Question 6

GASB

Answer 6

• Governmental Accounting Standards Board
• The GASB statement of reporting objectives for state and local governments calls for financial reporting to assist in fulfilling government’s duty to be publicly accountable and to help users assess that accountability.

Question 7

FASB

Answer 7

• Financial Accounting Standards Board
• FASB’s financial reporting objectives focus on information useful to present and potential resource providers, as well as other users, in making rational decisions about allocating resources to those organizations.

Question 8

Different types of revenue sources for Governments

Answer 8

Taxes

Question 9

Different types of revenue sources for nonprofits:

Answer 9

Donations and grants

Question 10

Nonprofits and Governments can engage in?

Answer 10

Both exchange and non-exchange transactions.

Question 11

Classifications of net assets for Nonprofits:

Answer 11

• Net assets with donor restrictions
• Net assets without donor restrictions

Question 12

Donors may impose restrictions such as:

Answer 12

Purpose - funds may be used only for a specific purpose
Time - funds may be used only at a specific point in time.

Question 13

Assets - Liabilities = ?

Answer 13

Net Assets

Question 14

Restrictions

Answer 14

Think external. If someone donates money, it HAS to be used for what they want. It MUST be reported that way - for specific purposes.

Question 15

Internal Restrictions?

Answer 15

Do not exist. ***When an entity itself earmarks money for a purpose it is not restricted because they have the control over the money and can change their mind. There is NO such thing as an internal restriction.

Question 16

NFP FASB Required Financial Statements

Answer 16

• Balance sheet (statement of financial position)
• Statement of Activities
• Statement of Functional Expenses
• Statement of Cash Flows

Question 17

What are the different sections on a statement of cash flows?

Answer 17

• Operating Activities
• Investing Activities
• Financing Activities

Question 18

Program Expense

Answer 18

An activity that is directly related to the purpose(s) for which the organization was established.

Question 19

Support Expense

Answer 19

The nature of resources received by many nonprofits.

Question 20

Management Expense

Answer 20

Associated with the overall direction and management of the organization, in addition to those associated with record keeping, the annual report, etc.

Question 21

Fundraising Expense

Answer 21

Other supporting services associated with the solicitation of money, materials, etc. for which the individual or organization making the contribution receives no economic benefit

Question 22

Spending when program AND fundraising

Answer 22

• Purpose
• Audience
• Content

Must fulfill all three to allocate expense between program and fundraising.

If any of the three aren’t met total expense is classified as fundraising.

Question 23

Museums - Collections - Option not to report donated asset if:

Answer 23

• Held for public exhibit, education, or research in furtherance of public service rather than financial gain.
• Protected, kept unencumbered, cared for, and preserved.
• Policy requires proceeds to go towards collections.

**Don’t recognize it as an asset if nothing will ever come of it. Price/Valuing these donations are irrelevant and will not be used for loans, etc.

Question 24

Reporting donated services

Answer 24

• Create or enhance a non-financial asset

OR

• Requires specialized skills, are provided by one who has those skills, and would have to pay for the services if they were not donated

**Record contribution revenue for the donation and offset with an expense.

Question 25

Revenue Recognition - Applicable to businesses as well as non for profits.

Answer 25

1. Identify contracts with the customer.
2. Identify performance obligations.
3. Determine the transaction price.
4. Allocate the transaction price to performance obligations.
5. Recognize revenue when performance obligations are satisfied.

**Do NOT follow the flow of cash for revenue recognition. Look at contracts and performance obligations.

Question 26

Conditional Pledge

Answer 26

Bind donor on an occurrence of a specified future and uncertain event. These promises are NOT recognized as revenue/receivables until conditions on which they depend are substantially met.

Question 27

Unconditional Pledge

Answer 27

A written or oral agreement to contribute cash or other assets to an entity. These promises meet the definition of an asset, FASB believes that promise makers generally feel bound to honor them. Need Allowance for Doubtful Accounts. Should be recognized as receivables or revenues when promises are made.

Question 28

Reporting contributions other than services and collections

Answer 28

• Reported as revenues or gains in the period received
• Reported as assets, decreases in liabilities, or expenses, depending on the form the benefits take.
• Measured at the fair value of the contribution received.
• Reported as either support with donor restrictions or support received without donor restrictions.

Question 29

Expense Reporting for Nonprofits

Answer 29

Function - refers to specific programs such as well as management and general activities, fundraising activities, and in some nonprofits, membership development activities.

Nature - refers to items such as salaries, rent, electricity, supplies, professional fees.

Question 30

Non for Profit Organization - Tax Exempt

Answer 30

• Once incorporated, NFP may apply to the federal government and if approved receive a determination letter which proves their tax exemption status.

Question 31

Donor restriction “in perpetuity”

Answer 31

• Donors may stipulate that their cash contribution be maintained permanently (“in perpetuity). With the income from investing the cash to be used to perform a specific research project.