Non-Profit Accounting

Question 1

Which financial statements are required for non-profit organizations?

Answer 1

Statement of Financial Position, Statement of Activities, Statement of Cash Flows, and Statement of Functional Expense (for Voluntary Health and Welfare Organizations Only)

Question 2

What are the major classifications found on a non-profit’s Statement of Financial Position?

Answer 2

Similar to Balance Sheet:

Assets
Liabilities
Net Assets
Unrestricted Net Assets 
Temporarily Restricted Net Assets
Permanently Restricted Net Assets

Question 3

What is the measurement focus and basis accounting used for non-profit accounting?

Answer 3

Economic Resources measurement focus so it follows Accrual accounting

Question 4

Are the assets and liabilities found on a non-profit’s Statement of Financial Position listed in order of liquidity?

Answer 4

Yes

Question 5

Who sets aside Unrestricted Net Assets?

Answer 5

The board of trustees

Question 6

What are the characteristics of unrestricted assets or revenue?

Answer 6

No restrictions or conditions placed on entity in order to use the resources

Note: assets earmarked internally by management are still unrestricted

Question 7

What type of restrictions are in place for Temporarily restricted Net Assets?

Answer 7

Time, Use, or Purpose

Question 8

Will the restrictions on Temporarily Restricted Net Assets eventually lapse?

Answer 8

Yes, after a certain amount of time (or after a specific EVENT has occurred), the temporary restrictions will lapse; thus, creating Unrestricted Net Assets

Question 9

Can the principal be spent for Restricted Net Assets? Can it be invested?

Answer 9

The principal may never be spent, but it may be invested. (Ex: Endowment)

Question 10

What is the principal called for Restricted Net Assets?

Answer 10

Corpus

Question 11

Are the dividend or interest earnings from Restricted Net Assets also restricted?

Answer 11

Can be restricted or unrestricted (or temporarily restricted) depending on donor’s stipulations

Question 12

Who are the only parties that can restrict the use of assets (in non-profit accounting)?

Answer 12

External parties (donors)

Question 13

What are the major classifications in a non-profit’s Statement of Activities? (Row labels)

Answer 13

Similar to an Income Statement, but also includes Retained Earnings (ala Net Assets):

1) Revenues, Gains, and Other Support
2) Net Assets Released From Restrictions
3) Expenses and Losses - ONLY deducted from Unrestricted Revenues
4) Changes in Net Assets
5) Beginning Net Assets
6) Ending Net Assets

Question 14

What are the Column headers (labels) on a non-profit’s Statement of Activities?

Answer 14

The Net Asset classifications: Unrestricted, Temporarily Restricted, and Permanently Restricted (along with a Total column header)

Question 15

How are Net assets released from restrictions treated on a non-profit’s Statement of Activities?

Answer 15

The amount is reduced in the Temporarily Restricted column and correspondingly increased in the Unrestricted column

Question 16

On a non-profit’s Statement of Activities, all expenses affect what type of Net Asset?

Answer 16

Unrestricted Net Assets

Question 17

Are any Expenses temporarily or permanently restricted?

Answer 17

No, because in order to spend the money, all restrictions have to have been removed. So they are only found in the Unrestricted column and accordingly deducted from Unrestricted Revenues. (don’t forget depreciation!!)

Question 18

Which revenue classification are expenses deducted from?

Answer 18

Expenses ONLY deducted from Unrestricted Revenues - not Temporary or Permanently Restricted Revenues (Net Assets)

Question 19

What are the major classifications of expenses for non-profits? Give an example of each.

Answer 19

1) Object (the “What”) - Salaries, depreciation
2) Function or Program (the “Why”) - health care, fire
3) Character (the “When”) - typically for debt service (past), current debt (present), or capital outlays (future)

Question 20

What are the characteristics of a Statement of Cash Flows for non-profits? What are the major classifications?

Answer 20

Both direct and indirect methods are permitted:

Operating Activities - Unrestricted Revenues and Unrestricted Expenses

Investing Activities - Purchasing of investments or fixed assets

Financing Activities - Endowments and restricted contributions

Question 21

What revenue types are associated with a non-profit’s Operating activities on its Statement of Cash Flows?

Answer 21

Both unrestricted and temporarily restricted revenues

Question 22

What revenue types are associated with a non-profit’s Financing activities on its Statement of Cash Flows?

Answer 22

Permanently restricted revenues (which makes sense, as the principal from debt financing is a financing activity for private for-profit firms)

Question 23

Proceeds spent on the acquisition of Fixed Assets are what type of activities in a non-profit’s Statement of Cash Flows?

Answer 23

Investing Activities

Question 24

Proceeds from contributions restricted for the acquisition of Fixed Assets are what type of activities in a non-profit’s Statement of Cash Flows?

Answer 24

Financing Activities

Question 25

Proceeds from contributions for long-term purposes are what type of activities in a non-profit’s Statement of Cash Flows?

Answer 25

Financing Activities

Question 26

Proceeds from contributions are usually what type of activities in a non-profit’s Statement of Cash Flows?

Answer 26

Operating Activities

Question 27

When are revenues on contributions recognized? What value are they recorded at?

Answer 27

Revenues on contributions are recognized in the year received - not the year the contribution is spent and are recorded at Fair Value on the date received

Question 28

Which organizations are required to present a Statement of Functional Expenses?

Answer 28

Volunteer Health and Welfare Organizations (VHWOs)

Question 29

What are the major categories on a Statement of Functional Expenses?

Answer 29

1) Public support (donation revenue - primary revenue source)
2) Revenues (earned revenues such as from investments, recurring member dues, or client service)
3) Program Expenses (the primary costs of running the program)
4) Support services (think marketing and soliciting of funds)

Question 30

When are services rendered recognized as contributions on the financial statements of a non-profit?

Answer 30

If specialized skills were required, the organization would have otherwise paid for them or They increase the value of a non - monetary asset (They are then deemed to be ESSENTIAL)

Question 31

Is the donation of an art collection recognized as a contribution or asset?

Answer 31

They aren’t usually recognized as assets or contribution revenue if they are held for display or research (education) purposes, or their sale results in the purchase of similar items (not the operation of the non-profit organization). Doing so would make them appear to possess great wealth and not be in need of support .

Question 32

How are unconditional pledges to contribute recorded?

Answer 32

Classified as revenue in the current year only. The associated receivable asset needs to also have an accompanying “allowance for uncollectibles” contra-account. Multi-year future contributions fall under Temporarily Restricted and are reported at present value of the future estimated cash flows using an appropriate discount rate commensurate with the risks involved.

Question 33

How are conditional pledges to contribute recorded?

Answer 33

Trick question! They are not recognized until they become unconditional (or the likelihood that the conditions on which the condition/promise depends will not be met).

Question 34

How are funds received prior to conditions being substantially met for conditional pledges recorded?

Answer 34

As liabilities until such time as the promises become unconditional

Question 35

If the non-profit organization is acting as an agent or trustee and they have the power to redirect the money, what are cash collections recorded as?

Answer 35

Contribution Revenue

Question 36

If the non-profit organization is acting as an agent or trustee and they don’t have the power to redirect the money, what are cash collections recorded as?

Answer 36

Refundable Advance (a liability)

Question 37

How is depreciation expense recorded by a non-profit organization?

Answer 37

In the same exact manner as commercial organizations (US GAAP).

Question 38

How are scholarships recorded for colleges and universities?

Answer 38

Scholarships are expensed as incurred (as opposed to a reduction of revenue), which effectively inflates tuition revenues (and the university’s sense of importance).

Question 39

How is tuition remission recorded for colleges and universities?

Answer 39

Tuition remission is expensed as incurred (as opposed to a reduction of revenue), which effectively inflates tuition revenues (and the university’s sense of importance).

Question 40

Which statements are required for non-profit healthcare organizations?

Answer 40

Balance Sheet
Statement of Operations
Statement of Changes in Net Assets
Statement of Cash Flows
Financial Statement Notes are also disclosed

Question 41

Is charity care treated as a revenue for non-profit healthcare organizations?

Answer 41

NO! It also doesn’t result in the recognition of a receivable. It is disclosed in the notes to the financial statements only.

Question 42

For non-profit healthcare organizations, what does the Statement of Changes in Net Assets specifically report on?

Answer 42

Restricted contributions (temporarily or permanently) for long-term purposes (plant acquisition, endowments, etc.).

Question 43

What financial statement for non-profit healthcare organizations requires the inclusion of a performance indicator?

Answer 43

Statement of Operations

Question 44

How are donated supplies to a non-profit healthcare organization recognized?

Answer 44

Recognized as an unrestricted contribution (revenue) at fair value in the period received and can be either an asset or an expense.

Question 45

What are the characteristics of temporarily restricted assets/revenue?

Answer 45

Use is restricted to a future time - which could then convert to unrestricted after an amount of time has lapsed or the specific use or purpose has occurred.

Question 46

What are the characteristics of an endowment?

Answer 46

Use of investment is restricted - but income from investment could be either restricted or unrestricted

Must be under control of receiving entity (Quasi Endowment) in order to be recorded in unrestricted net assets

Otherwise - a memo entry is recorded

Question 47

When both Temporarily Restricted Assets and Unrestricted Assets are available for use - which assets are used first?

Answer 47

Temporarily restricted assets are used before Unrestricted assets.

Question 48

How are marketable securities investments recorded and valued in non-profit accounting?

Answer 48

They are required to use Fair Value accounting for most debt and equity investments and both realized and unrealized gains and losses are directly reported on the Statement of Activities.

Question 49

How might depreciation show up on a non-profit’s Statement of Cash Flows?

Answer 49

Only in the reconciliation of Net Assets to net cash provided from Operating Activities (Indirect Method).

Question 50

On a non-profit healthcare organization’s Statement of Operations, what is the performance indicator similar to on a commercial organization’s income statement?

Answer 50

Net Income/Earnings. It is effectively operating income (excess of revenues and gains over expenses and losses).

Question 51

Do asset purchases such as Inventory, Investments, or Fixed Assets affect the Statement of Activities for non-profit organizations?

Answer 51

No! Just like commercial organizations, asset purchases only affect the balance sheet (and the statement of cash flows).

Question 52

How is a non-profit healthcare organization’s Statement of Operations organized?

Answer 52

Patient Service revenue
-Provision for contractual adjustments
=Net patient service revenues
+Other operating revenues (non-medical such as parking and gift shop)
-Operating Expenses
+Non-operating revenues (unrestricted donations, dividends, interest)
=Excess of Revenue/gains over Expenses/Losses (this is your Performance Indicator
(“PP-NO-ONE”)
**Also separately reported items are disclosed below the Performance Indicator

Question 53

On a non-profit healthcare organization’s Statement of Operations, what items are reported separately from the performance indicator?

Answer 53

Restricted donations/contributions
Fixed assets released from donor restrictions
Restricted Investment Income
Changes in net unrealized gains/losses on unrestricted investments (other than trading)
Transfers to Parent
Discontinued operations and Extraordinary Items

(“RFR-CTD”)

Question 54

Upon spending temporarily restricted funds, how does this affect a non-profit’s Statement of Activities?

Answer 54

Since Expenses can only be deducted from Unrestricted Revenues, the previously Temporarily Restricted Net Assets need to be reclassified into Unrestricted Net Assets. The expense will then be accordingly deducted (recorded).
(2 debits, 1 credit)

Question 55

Name the primary authoritative source for GAAP for non-profit organizations?

Answer 55

Financial Accounting Standards Board

Question 56

What are some unrestricted revenues for a university?

Answer 56

1) Student tuition and fees (at gross)
2) Government aid, grants, and contracts
3) Gifts and private grants
4) Endowment income
5) Sales and services of educational departments
6) Revenues of auxiliary enterprises