F6 NFP

Question 1

F6 M1
NFP require 3 statements to be reported

Answer 1

a) statement of activities: similar to I/S. report change in net assets for period; demonstrate how org resources are used in providing various programs and services. It classify balances for changes in classification of net assets like income, expense, and net assets by classification like net assets without donor restrictions.
b) statement of financial position: similar to B/S. classify balance as assets, liab, and net assets
c) statement of cash flows: similar to statement of CF

Question 2

At year-end NFP require to produce:

Answer 2

a) statement of financial position (net assets with or without donor restrictions) b) statement of activities, c) statement of cash flows. Also disclose, display, or report relationship between functional classifications and natural classifications of expenses

Question 3

How to treat operating expenses?

Answer 3

Operating expenses for NFP decreases in net assets without donor restrictions, listed under “expenses and losses” in the statement of activities. If operating expenses relate to donor restrictions than are reclassified to without donor restrictions

Question 4

What are the categories of functional expenses?

Answer 4

1) program services: expenses relate to mission or service delivery obj of org. example education and research, labor negotiations, teacher salaries for educational org
2) support services: relate to indirectly support org mission i.e general and admin costs, fundraising, membership development/ publicity costs
3) fund-raising 4) management and general.
* If expenses are combination of program and service costs than use allocation basis where costs are combined
* Reported in statement of activity by categories above and disclosure classification by function notes to be in F/S

Question 5

How to treat donor-imposed restrictions?

Answer 5

Donor-imposed restrictions that are met in the same period they are received may be recorded as support (contribution revenue) without donor restrictions, provided that the organization discloses and consistently applies this accounting policy. When donor restrictions are satisfied, amount can be reclassified to increase net assets without donor restrictions. Donations with donor requirements/restrictions can not be part of net assets withouts donor restrictions

Question 6

What are examples of of donations that classify as net assets without donor restrictions?

Answer 6

a) Donor donating amount that was used for project and project completed YE, the remaining amount restrictions are lifted b/c funds were used for intended purpose
b) Org BOD designates donation amounts to projects do not have donor restrictions b/c internal designation and donor restrictions can only come from outside org

Question 7

How will transactions change net assets balance?

Answer 7

1) Endowment earnings = donor restrictions available to pay costs of programming and reclassified to net assets without donor restrictions to costs of program
2) Donor-restricted endowments are net assets with donor restrictions available to cover costs of programming. To determine net assets without donor restrictions take the cost minus fees minus donor restrictions endowments equal to amount without donor restriction
3) increases in net assets with donor restrictions result from contributions with donor-imposed restrictions that may be either in perpetuity or temporary in nature
4) Net assets are characterized as residual interest

Question 8

Examples to calculate amount of net assets?

Answer 8

a) with donor restrictions at Y2.= contribution donor restriction + interest earned donor restriction as per request
b) released from restrictions for year= amount of program expenses b/c restricted donations are released from restrictions when eligibility requirements are satisfied
c) net effect on net assets with donor restrictions= =Investment earnings from original donor gift + increase in market value of underlying endowment
d) Calculate increase in net assets with donor restrictions in current year statement of activities = increase in net assets w donor restrictions + endowment in perpetuity - net assets released from restrictions
* quasi-endowment is donation without donor restrictions and is excluded
e) Board-designated net assets (for future expenditures) represent board designations of monies that may be expended, not invested. Net assets subject to the passage of time” is a classification of net assets with donor restrictions that is disclosed in the notes to the financial statements and would not be appropriate for a board-designated endowment.

Question 9

Other important details?

Answer 9

Under GAAP, NFP reports using full accrual basis of accounting
- Cash gift with restriction is an asset with donor restrictions
- FASCB ASC 958: focuses on basic info for org as a while
- cash flow statement prepared using indirect method when interest paid it will be included as supplemental disclosure

Question 10

Explain difference between non-current assets and current assets?

Answer 10

Non-current assets is restricted cash and donor restricted funds in perpetuity (endowment securities); while current assets without donor restrictions and can be earnings on endowment designated by external donor for ongoing program expenses

Question 11

F6 M6
Explain the difference between governmental funds, proprietary funds, and fiduciary funds

Answer 11

a) governmental funds are governmental activities that are modified accruals and financial resources measurement focus use “GRSSP”: general, special revenue, debt service, capital projects, and permanent
b) Proprietary funds are basic activities that are full accruals and economic resources measurement use “SE”: internal service and enterprise
c) Fiduciary full accrual and economic resources measurement focus use “CIPPOE”: Custodial, investment trust, private purpose trust, and pension and other employee benefit trust

Question 12

What is the difference between independent gov and gov wide?

Answer 12

independent gov use modified accrual but gov wide requires presentation of full accrual for both gov and business type

Question 13

How can local gov record funds?

Answer 13

Both accrual and modified accrual basis

Question 14

What are the characterics of government funds

Answer 14

a) Current financial resource measurement focus is used only by gov funds identified by GRSPP
b) use a MODIFIED accrual basis of account
c) do not require statement of presentation
d) budgetary focus
e) focus on financial position (B/S)
f) primary focus is on source, use, and balance of current financial resources ie flow of current financial resources

Question 15

When to recognize revenue on gov funds?

Answer 15

Modified accrual basis for gov unit, revenue should be recognized when become available and measurable

Question 16

What are definitions to Gov funds GRSPP

Answer 16

1) General:
2) Special Revenue: revenue from specific taxes or other earmarked by law are restricted to particular activities. Expendable may be entirely used up
3) Debt Revenue/Service:
4) Capital projects:
5) Permanent: report resources that are legally restricted to extent income and not principal. used for purpose supporting gov programs for benefit of public

Question 17

F6 M5
What are the 3 primary user groups of state government external financial reports?

Answer 17

1) citizens (advocate groups) in jurisdiction
2) individuals and groups charges with oversight (legislative/executives groups
3) investors/creditors

Question 18

What is Governmental Accounting Standards Board “GASB”?

Answer 18

Primary authority to determine measurement focus and basis of accounting standards for governmental fund operating statements

Question 19

What is the fund structure of gov entity and determines # of fund used?

Answer 19

Based on judgment to properly segregate and ensure sound financial admin to properly safeguard assets

Question 20

What is GASB 34 requirement?

Answer 20

Separate fund financial statements should be presented for governmental and proprietary funds to report additional and detailed information about the primary government.

Question 21

What are NFP requirement/recommendations of disclosures?

Answer 21

a) Budget comparisons are presented as required supplementary information
b) Internal service funds are presented in summary in the fund financial statements.
c) Prioritization of general revenue distributions is displayed in the statement of activities in the government-wide financial statements

Question 22

How are fund accounting resources treated?

Answer 22

resources are segregated to carry out specific activities or attaining certain objectives

Question 23

What is the difference between main and secondary objective of financial reporting by state & local gov?

Answer 23

1) Main is reliability
2) Secondary: timeliness (easy to report), comparability (easy to report), accountability, consistency (easy to report)
* Relevancy is the most difficult to report

Question 24

F6 M4

How are depreciated expenses treated in statement of activities?

Answer 24

as operating expenses without donor restricted and decrease net assets. an example is a freezer b/s considered a fixed asset

Question 25

How is a financial interrelated with beneficiary org be displayed/disclosed in NFP org F/S?

Answer 25

Beneficiaries w financial interest in recipient org report change in interest on their statement of activities. The JE on interest in net assets of recipient is adj for beneficiary’s share of change as DR Interest in net assets and CR Interest in XX Foundation net assets (statement of activities).

It is financial interrelated as stated in FASB ASC 958-605 must be both influential in operating and financial decisions and has ongoing economic interest in net assets of other

Question 26

How to determine increase to equity security net assets?

Answer 26

= equity security received +- increase/decrease by change in market value + dividend received
* brokerage fees not included
* debt & equity securities that are readily determinable fair values are reported at fair value (quoted market prices) in statement of financial position as of the financial statement date
* gains/losses on investments are in statement of activities

Question 27

Calculate total value of investments reported in YE statement of financial position?

Answer 27

Calculate total value of investments reported in YE statement of financial position?

Question 28

How to classify gains and losses on purchased investments w endowment assets with donor restrictions?

Answer 28

Reported in statement of activities as increase/decrease in net assets without donor restrictions

Question 29

How to report the following

Answer 29

a) Investment income like dividends and interest is reported in period earned as increase in net assets
b) Donated shares of stock are measured at their fair value on the date of donation.
c) pledged funds received by donor to another health org will increase assets and increase liab to beneficiary. If had variance power (discretionary) over funds than recognize as revenue but since they don’t than its a liability

Question 30

F6 M3
What is the accounting treatment for following?

Answer 30

a) conditional grants: specific req and right to release from obligation if cant meet specific requirement = conditional and revenue contribution is recognized as each milestone met as donor restriction
b) mortgage notes payable recorded as PV of
liability
c) cafeteria revenue of hospitals is “other revenues”
d) A “notice” given to beneficiary when org named in will is not conclusive enough for recording revenue
e) Special events that represent a major source of revenue like annual fundraising event revenues and expenses should not be netted together, rather fully display gross revenues and expenses
f) if org receives funding for specific equipment in Y1 and amount is used for the purchase of specific equipment in Y2 than Y1 will be recorded as net assets with donor restrictions for funding amount received

Question 31

Explain the difference between unconditional and conditional promise?

Answer 31

An unconditional promise is a contribution revenue & recorded @ fair value when the promise is made ie cash received. While conditional promise depends on the satisfaction of a 1) measurable performance in specific output 2) subject to the donor’s right to require return of the donation if conditions are not met, and recorded as contribution receivable. Recognition only occurs when the conditions are substantially met, and the promise becomes unconditional. Recognition of a conditional revenue is impossible

Example Salvation Church has not met the condition of the bequest, it would not recognize any earnings in any year. Matching & cost eligibility requirements are both examples of conditions b/c of measurable performance-based barriers or other barriers

Question 32

Example of contribution revenue recorded

Answer 32

Org received contribution in Y1 and used donor restriction condition in Y2. In Y1 the contribution is recorded as Income Revenue and classified as contributions with donor restrictions and increase net assets with donor restrictions until period for restriction has passed

Question 33

How to treat cash contributions?

Answer 33

a) Contribution revenue = contribution - fair value of purchase ie ticket sales because ticket revenue is purely from tickets and not included
b) Contribution with donor restrictions: org includes right of return and right of release from obligation clauses in their agreements but does not impose measurable barriers does not impose a condition. Revenue is unconditional and revenue is recognized immediately
c) Donations of medicines are included as other operating revenue at the fair value of the medicine, because the medicine constitutes part of the ongoing major operation of the hospital.

Question 34

How to treat multi-year pledges?

Answer 34

Multi-year pledge recorded at Y1 as contribution revenue . Future pledges collected are classified as “with donor restrictions” and reclassified as “without donor restrictions”. Reclassifications are not revenues

Question 35

How to treat contribution of work of art, historical treasures, and similar assets?

Answer 35

Do not need to be recognized as contributions if meet all of the following conditions:
a) The item is part of a collection, which is held for public viewing, exhibition, education, or research (and not for investment or financial gain);
b) The collection is cared for, preserved, and protected by the organization; and
c)The organization has a policy that requires any proceeds from the sale of donated items to be reinvested in other collection items or used to support the direct care of existing collections.

Question 36

How to report scholarship donations?

Answer 36

Tuition fees from students increases net assets without donor restrictions and scholarships to students is decrease in net assets without donor restrictions. JE for record satisfaction of donor-restricted contributions used for scholarships. is DR Satisfaction of program restrictions, donor-restricted and CR Satisfaction of program restrictions, without donor restrictions. JE record award of scholarships is DR Scholarship Expense and CR Tuition revenues.

Question 37

What is donated services?

Answer 37

Recorded as contribution revenue and expense at fair value if the services meet following criteria: a) create or enhance a non-financial asset. b) require specialized skills that the provider possesses and would otherwise have been purchased by the organization.
Only recognized SOME of the time: when the service is 1) specialized, 2) Otherwise needed, and 3) Measured Easily.

JE: Expense DR and Contributions CR

Question 38

How to calculate donated services?

Answer 38

Donated services amount is both a contribution and service if its performed as part of normal program or supporting services and otherwise performed by salaried personnel its included. It may include salary employees and qualified donated services. Employees working at special events not included in amount.

Question 39

Calculate net patient service revenue by hospital?

Answer 39

= gross patient revenue including charity care - charity care - contractual adj

Question 40

How to report NFP expenses?

Answer 40

As without donor restrictions. If amount with donor restrictions is donation and expenses are incurred than Revenue is recorded as with donor restrictions on full amount donation and expenses are recorded at without donor restrictions on expenses

Question 41

What is reciprocal transfer?

Answer 41

Also known as exchange is not a contribution rather it increases net assets without donor restrictions.

Question 42

F6 M2
What is reported in investing activities:

Answer 42

-proceeds from the sale of works of art or purchases of works of art; insurances proceeds from loss of long lived assets or proceeds from sale of long lived assets
- Cash flows from purchases, sales, and insurance recoveries of unrecognized, non-capitalized collection items should be reported as investing activities in a statement of cash flows.

Question 43

what is reported in operating activities?

Answer 43

Cash contributions without donor restrictions are increased in operating activities

• when buying a truck on borrowed money, cash inflow is from operating activities and cash outflow is from investing activities

Question 44

What is reported in financing activities?

Answer 44

cash contributions with donor restrictions are increased in financing activities b/c restrictions is acquisition of property not general operations
- Calculate net cash provided by financing in statement of cash flows= issuance of LT debt

Question 45

How is depreciation treated in CF?

Answer 45

depreciation is added back to the change in net assets because it represents a non-cash expense, while decrease in AP is cash paid to vendors and will subtract from net assets and be a cash outflow

Question 46

How are items treated in CF?

Answer 46

• Costs of collection items purchased as a decrease in the appropriate class of net assets
• Proceeds from sale of collection items as an increase in the appropriate class of net assets