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FAR > Nonprofit Accounting > Flashcards

Nonprofit Accounting Flashcards

1
Q

Are nonprofit organizations required to use fund accounting?

A

No, though it is permitted

NPOs do not generally use budgetary or encumbrance accounting either

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2
Q

What are contributions?

A

Unconditional transfers of cash/assets by a non-owner

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3
Q

What are pledges?

A

Conditional promises to give – conditioned upon some future uncertain event

If uncertainty is remote, these are deemed unconditional

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4
Q

When is a pledge recorded?

A

Not recorded until it becomes unconditional (though it is recognized whenever there’s evidence of the conditional promise)

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5
Q

What happens if a promise contains stipulations which are ambiguous?

A

Presumed to be conditional unless clearly unconditional

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6
Q

What happens if it is ambiguous whether a given communication is a promise?

A

If it involves a legally enforceable intention to give, then it counts as a promise

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7
Q

What is a donor-imposed condition?

A

An uncertain event that frees the donor from the obligation to give, or gives the donor the right to have the asset back

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8
Q

What is a donor-imposed restriction?

A

Specifies the permissible use of the donated asset

Can be temporary or permanent

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9
Q

What is a permanent restriction?

A

A donor-imposed restriction which requires donated assets to be permanently maintained (i.e. not used), although the NPO can use returns on investment

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10
Q

What are board-restricted assets?

A

Restrictions by the NPO’s governing board on asset use – within the range of use permitted by the donor

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11
Q

What is peculiar about board-restricted assets?

A

They are classified as unrestricted assets

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12
Q

Under what circumstances are contributions of service recognized?

A

Only if:

(a) Nonfinancial assets are created or improved by the service, or
(b) Special skills are required, such that the service would otherwise be purchased

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13
Q

How are contributed collection items recognized?

A

Recognized as revenues or gains if, and only if, collections are capitalized

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14
Q

An entity does not need to recognize contributions of collection items under what circumstances?

A

If the items are added to collections that:

  • benefit the public (rather than being for private profit)
  • are protected and preserved
  • are part of a policy requiring proceeds on the items to purchase other collection items
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15
Q

How are contributions classified as revenues or gains?

A

Revenues if part of central/major activities

Gains if part of peripheral/minor activities

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16
Q

How are contributions reported, and what accounts do they affect?

A

Restricted contributions are reported as “Restricted Support” and increase Permanently/Temporarily Restricted Net Assets

Unrestricted contributions are reported as “Unrestricted Support” and increase Unrestricted Net Assets

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17
Q

When should the expiration of donor-imposed restrictions be recognized?

A

In the period when the restriction expires

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18
Q

Under what circumstances are contributed services reported as both expenses and revenues?

A

If (1) services would otherwise be purchased,

(2) value of services is measurable, and
(3) there is essentially an employer-employee relationship

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19
Q

How are unconditional pledges reported?

A

As a receivable, recorded at PV if one year or longer

Reported net of an allowance for uncollectible amounts

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20
Q

How are unrestricted pledges reported?

A

Reported in statement of revenue and expenses

If part of pledge is to be used in some future period, that part is reported as restricted revenue

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21
Q

How are restricted pledges reported?

A

Reported as restricted support unless donor explicitly intends it to be used in current period

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22
Q

How are pledges to give future amounts recorded?

A

Usually increase temporarily restricted net assets

Pledges to give in the future have an implied restriction for future use

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23
Q

How are capitalized contributed collections reported?

A

Proceeds from sales (and from insurance recoveries for items not previously capitalized) are reported separately from revenues, expenses, gains, and losses

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24
Q

How are noncapitalized contributed collections reported?

A
  • Cost of items decrease net assets
  • Proceeds from selling items increase assets
  • Proceeds from insurance recoveries of lost/damaged items increase net assets

The type of asset/net asset changed will be based on how restricted it is

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25
Q

What happens when a donated long-lived asset is put in use?

A

It is transferred to unrestricted net assets, unless the donor has placed a restriction on it

Same applies for donated assets used to acquire long-lived assets

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26
Q

If a long-lived asset has no donor stipulations restricting its use, when would it still be classified as restricted?

A

If the NPO’s accounting policy is to imply a time restriction that expires over the asset’s useful life
-If not, then the asset is reported as unrestricted support

Again, this also applies to donated assets that are intended to purchase long-lived assets

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27
Q

What are intermediary transactions?

A

When the NPO is given assets (from a resource provider) and must give the assets to another organization

The NPO intermediary acts as an agent

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28
Q

If an NPO is an intermediary, is it always acting as an agent?

A

No – it depends on how much discretion the NPO has to use the assets

If sufficient discretion is permitted, then the NPO is a donee rather than an agent

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29
Q

What are different factors determining how much discretion an NPO has in an intermediary transaction?

A
  • why the NPO requests the asset
  • composition of asset (e.g. NPO gains land but distributes cash to other party)
  • legal title to assets
  • intent to transfer
  • awareness of ultimate recipient
  • type of NPO (whether it has independent operations or serves to collect and distribute assets)
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30
Q

If an asset is donated to a recipient for the sake of a different beneficiary, how does the recipient report it?

A

Recognizes both asset and liability

If the donor gives the beneficiary variance powers, or if the recipient and beneficiary are “financially interrelated entities,” then recipient records it as contribution (not a liability)

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31
Q

What are variance powers?

A

They give the recipient the ability to change the beneficiary

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32
Q

For a donation to a recipient for the sake of a beneficiary, what are four conditions where the recipient recognizes a liability and the donor recognizes an asset?

A
  • The donor may redirect the asset to a different beneficiary
  • The donor may revoke the asset
  • The donor controls the recipient
  • The donor or an affiliate is the beneficiary (and the transfer is not equity)
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33
Q

If the beneficiary and the recipient are financially interrelated, what does the beneficiary report?

A

An interest in the recipient’s net assets

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34
Q

What does a beneficiary report if he is unconditionally entitled to receive the assets?

A

He reports a beneficial interest

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35
Q

What does the beneficiary recognize if the recipient is given variance power?

A

Doesn’t recognize an asset

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36
Q

If variance power is not granted to the recipient, and if the beneficiary does not recognize a beneficial interest or interest in net assets, what should he report?

A

A receivable

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37
Q

How is a transfer recorded if equity is transferred and the donor is the beneficiary?

A

Donor records interest in net assets of recipient

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38
Q

How is a transfer recorded if equity is transferred and an affiliate of the donor is the beneficiary?

A

Donor and recipient both record equity transaction as separate line item in statement of activities

Beneficiary records interest in net assets of recipient

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39
Q

How do NPOs record investment income?

A

Included in statement of activities as increases/decreases in unrestricted net assets (unless the securities are restricted)

Same goes for gains/losses

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40
Q

Under what circumstances is an organization deemed “related” to an NPO?

A

Under any of the following circumstances:(1) NPO controls organization (whether through contracts, legal documents, etc.)

(2) NPO is only beneficiary of organization
(3) NPO is liable for the organization’s debts should it liquidate

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41
Q

What is the method by which two NPOs become a new NPO?

A

Carryover method

Assets and liabilities are combined at their carrying amounts

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42
Q

In the carryover method, what changes might still be made in the financials?

A
  • statements might need adjusted to GAAP
  • reclassifications might be necessary to have uniform accounting (e.g. being measured differently)
  • transactions between NPOs might be removed
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43
Q

Does the new NPO from a merger reflect the merger in its own financials?

A

No

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44
Q

What is the method by which an NPO records an acquisition of another NPO?

A

Acquisition method – essentially the same as the method by which for-profit entities acquire other companies

Identifiable assets, assumed liabilities, and noncontrolling interest are all recorded at acquisition-date FV

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45
Q

Can NPOs have goodwill?

A

Yes, and the more business-like the NPO (the more it generates its own revenues), the more goodwill is relevant

46
Q

What does an NPO recognize if the acquired NPO has goodwill, but the acquiring NPO functions primarily by donations?

A

Amount that would have been recognized as goodwill is recorded as separate charge in statement of activities

47
Q

What happens if the acquirer NPO gains net assets without exchanging equivalent consideration?

A

Such assets are basically contributions

Contribution should be recorded as a separate credit in statement of activities

48
Q

What are the ways that the acquisition method is different for NPOs?

A

(1) acquirer doesn’t recognize any acquired donor relationship as an asset (i.e. separate from goodwill)
(2) if the acquirer doesn’t capitalize collections, then he shouldn’t recognize any such assets (e.g. art)
(3) conditional promises are recognized only if fulfilled
(4) if some acquired assets are conditionally promised to be contributed elsewhere, then they are recorded as a refundable advance (unless the conditions are fulfilled)

49
Q

What financial statements are NPOs required to present?

A
  • Statement of Financial Position
  • Statement of Activities
  • Statement of Cash Flows

Similar to for-profit companies, except that fund statements are also optional, though they must be aggregated

50
Q

On the statement of financial position, how should net assets be reported?

A
  • permanently restricted
  • temporarily restricted
  • unrestricted

Notice, this is how NET assets are reported (equivalent to equity), not how assets are reported

51
Q

On the statement of financial position, how should assets be reported?

A

According to liquidity

Assets restricted to a particular purpose have the same liquidity as that purpose (e.g. cash restricted to buy PP&E will be far less liquid)

52
Q

What is the sequence of items in the statement of activities?

A 
Revenues and Other Additions
- Expenditures and Other Deductions
\+/- Transfers Among Funds
= Net Increase (Decrease) in Net Assets
\+ Net Assets -- Beginning of Year
= Net Assets -- End of Year
53
Q

In the statement of activities, how are revenues, expenses, gains, and losses classified?

A

Into the three restricted classes

All expenses are decreases in unrestricted net assets

54
Q

How may an NPO report investment revenues on the statement of activities?

A

Net of expenses (e.g. advisory fees)

This is the case for all peripheral gains/losses as well

Ordinary revenues and expenses should be reported gross

55
Q

How should expenses be classified in the statement of activities?

A

By functional classification (e.g. for program services)

56
Q

What are the two main types of activities for an NPO?

A

Program services (main operations) and supporting activities

57
Q

What are different kinds of supporting activities?

A

Management and general activities

Fund-raising activities

Membership-development activities

58
Q

What is the alternative way to report a statement of activities?

A

In two parts: (1) a Statement of Unrestricted Revenues, Expenses, and Other Changes in Unrestricted Net Assets, and (2) a Statement of Changes in Net Assets

Basically, they handle (1) unrestricted net assets and (2) restricted net assets, respectively

59
Q

What is the Statement of Unrestricted Revenues, Expenses, and Other Changes in Unrestricted Net Assets?

A

Based on the general funds

a.k.a. Statement of Operations

60
Q

What is included in the Statement of Changes in Net Assets?

A

Summarizes first part and reports changes in restricted net assets

61
Q

In the statement of cash flows, what is included in financing activities?

A

Receiving resources that are restricted for long-term purposes

This includes any interest and dividends that would also be so restricted (they would otherwise be under operating activities)

62
Q

What is the Statement of Functional Expenses?

A

Required only for Voluntary Health and Welfare Organizations (VHWOs)

Provides further details about Statement of Activities through functional and natural/object classification

Should be presented in matrix format

63
Q

What are examples of natural classifications?

A

Salaries, rent, utilities, depreciation, etc.

64
Q

What general disclosures are required for NPO financials?

A
  • ratio of fundraising expenses to amount raised, and how ratio is computed
  • depreciation info (expense, depreciable base, accumulated depreciation, method)
65
Q

On what sorts of items is depreciation expense not recognized?

A

Individual works of art or antiquity

NPO must prove that the work has value to preserve and that it is capable of preserving it

66
Q

How do health care entities (HCEs) generally report revenues and expenses?

A

Basically the same as businesses – use accrual basis, recognize depreciation and amortization, have a provision for bad debts, etc.

67
Q

What are the two classes of unrestricted revenue for HCEs?

A

Patient Service Revenue

Other Revenue (e.g. tuition from teaching programs, cafeteria revenue, fees for copies of medical records, etc.)

68
Q

How is patient service revenue generally reported?

A

Reported net of bad debts

Does not include any possible revenues from charity care, since that is intended as free

69
Q

How else is patient service revenue netted?

A

Beside deductions for Bad Debts, there are deductions for Contractual Adjustments and Other Adjustments

70
Q

How did bad debts used to be recorded in HCE financials?

A

Not as a deduction from revenue, but merely as an expense
-Change occurred in December 2011.

Further, now, bad debts for non-patient service revenues are still classified as operating expenses, not deductions

71
Q

How do HCEs report gains and losses?

A

Operating if part of central activities (which is uncommon), nonoperating if part of peripheral activities

Includes contributions, returns on investments, amounts from endowment funds available for general operating purposes

72
Q

When would investment income be reported as revenue?

A

If it is essential to provide the services (e.g. a donation of an endowment that is necessary to fund a hospital)

73
Q

How do commercial and governmental HCEs differ from NP HCEs?

A

Commercial HCEs have financials similar to other investor-owned entities

Governmental HCEs are accounted for as enterprise funds

74
Q

How do colleges/universities report waived tuition (or other fees)?

A

The full amount of tuition is recognized, with the waived amount being an expenditure (e.g. Tuition Remissions, Scholarships)

Class Cancellation Refunds are not classified as revenue or expenditure, however

75
Q

What are some typical operating accounts for colleges and universities?

A
  • Tuition and Fees
  • Appropriations
  • Grants and Contracts
  • Private Gifts, Grants, and Contracts
  • Endowment Income
  • Sales and Service of Educational Activities
  • Auxiliary Enterprises [revenues]
  • Educational and General
  • Mandatory Transfers
  • Nonmandatory transfers
  • Auxiliary Enterprises [expenses]
76
Q

What are auxiliary enterprises for colleges and universities?

A

Things like residence halls, cafeterias, athletic programs, and hospitals

77
Q

What are the eight different subcategories within the Educational and General account?

A
  • Instruction
  • Research
  • Public Services
  • Academic Support
  • Student Services
  • Institutional Support
  • Operation and Maintenance of Plant
  • Scholarships and Fellowships
78
Q

How is a university statement of activities formatted?

A

Has different columns in three groupings: current funds, trust funds (although universities don’t specifically use this label), and plant funds

Each of the three is broken down further

79
Q

What are Voluntary Health & Welfare Organizations (VHWOs)?

A

Offer free or low-cost services, and are primarily supported by donations

E.g. United Way, American Heart Association, Boy Scouts, YMCA

80
Q

Which four statements are required for VHWOs?

A

Same as required for other NPOs, plus a Statement of Functional Expenses

81
Q

What is notable on VHWOs’ statement of activities?

A

Public Support is in a separate category from Revenue (which includes things like membership dues and investment income)

82
Q

What are the two categories of funds reported by HCEs?

A

General funds and donor-restricted funds

Each fund (i.e. the general fund and each donor-restricted fund) involves a self-balancing group of accounts

83
Q

What can be included in HCE general funds?

A

Assets whose use is limited solely by the board (rather than the donor)

Agency funds

PP&E used for general operations (rather than restricted)

84
Q

What are specific-purpose funds?

A

Funds restricted to some specific operating purpose, such as research or education

85
Q

What are plant replacement and expansion funds for HCEs?

A

Restricted to capital outlays

Expenditures of this fund decrease net assets for the plant fund and then increase PP&E and net assets for the general fund

Besides the PP&E itself, long-term debt issued to buy PP&E is not accounted for in the plant fund

86
Q

What are endowment funds?

A

(Usually) permanently restricted funds whose principal cannot be spent

Investment income can be restricted or not, depending on donor stipulations

87
Q

What are term endowment funds?

A

Restricted funds whose principal can be spent after certain conditions are satisfied (e.g. the donor dies, or a time period passes)

88
Q

What is an acronym to remember different hospital funds?

A

UPSET

Unrestricted general
Plant replacement
Specific-purpose
Endowment
Term endowment
89
Q

For a university, if revenues are partly restricted for debt service or capital outlay, how is it reported?

A

Full amount is reported as unrestricted current fund revenue

Restricted amount is recorded as mandatory transfer to appropriate fund

90
Q

For a university, if revenues are designated (by the board) for debt service or capital outlay, how is it reported?

A

Full amount is reported as unrestricted current fund revenue, with a nonmandatory transfer to the appropriate funds

91
Q

For a university, if some fund becomes unrestricted (e.g. an endowment), how is it reported?

A

Remaining balance is recorded in Net Assets Released From Restrictions (NARFR) in the unrestricted current fund

92
Q

How may universities account for inventory?

A

Consumption/use method

Purchases charged to Expenses, but change in inventory is an adjustment to Expenses at year-end

93
Q

What is a life income fund?

A

A trust fund which requires the income earned by the fund to be paid towards a recipient for a given time, usually the donor’s or recipient’s lifetime

Generally associated with annuity funds, which are different in that they have guaranteed fixed payments

94
Q

How is a life income fund recorded?

A

At inception, no payable is recorded, since no fixed payments are required

As income grows, no revenue is credited – rather, Income Payable to Beneficiary is credited

95
Q

What are quasi-endowment funds?

A

Endowment funds which are not stipulated by a donor but designated as such by the board

96
Q

What is an acronym to remember different university funds?

A

C PAL ALE

Current Funds (unrestricted/restricted)

Plant funds
Agency funds
Loan funds

Annuity fund
Life income fund
Endowment funds (including term endowment and quasi-endowment)

97
Q

How do plant funds for universities differ from plant funds for HCEs?

A

University plant funds include cash restricted or designated for paying long-term debt on capital outlays

98
Q

What is included in university plant funds?

A

All fixed assets and long-term debt that is not related to university trust funds

99
Q

What are the four plant fund subdivisions?

A

URRI

Unexpended Plant Fund
(Fund for) Renewals and Replacements
(Fund for) Retirement of Indebtedness
Investment in Plant

100
Q

What are unexpended plant funds?

A

Used to buy new fixed assets (or at least, newly acquired fixed assets)

New assets are capitalized in Investment in Plant account

101
Q

What are plant funds for renewals and replacements?

A

Used to renovate or replace existing university assets

Major improvements or replacements are capitalized in Investment in Plant accounts, but this is rare

102
Q

What are plant funds for retirement of indebtedness?

A

Account for restricted/designated assets used to repay principal and interest

103
Q

What are Investment in Plant accounts?

A

Records general fixed assets, general long-term debt, and difference between the two (which is “net investment in plant”)

Nongovernmental universities must report depreciation expense and accumulated depreciation on these assets in the Statement of Activities

104
Q

What HCE fund is the (university) restricted current fund like?

A

The specific-purpose fund

105
Q

What is the format for a university statement of financial position?

A

Assets on one side, liabilities and net assets on the other

Divided first by fund type (e.g. Current Funds, Loan Funds, Endowment Funds, Annuity and Life Income Fund, Plant Funds)

Then sometimes subdivided further (e.g. Unrestricted/Restricted for Current Funds, different Plant Funds)

106
Q

How do VHWO funds differ from hospital funds?

A

VHWO funds record revenues and expenses in each fund (with a total column at the end), whereas hospital funds record them in a single unrestricted fund

107
Q

What are the different fund types for VHWO funds?

A

L CRUEL

Land, Building, and Equipment (or Plant) Fund

Custodian Fund
Restricted Current Fund
Unrestricted Current Fund
Endowment Fund
Loan and Annuity Fund
108
Q

What is the Land, Buildings, and Equipment (or Plant) Fund?

A

Accounts for resources to buy PP&E, the PP&E themselves, long-term debt on the PP&E, and the net investment in the PP&E

Basically identical to the university plant fund, though VHWOs may record debt service in the unrestricted current fund instead

109
Q

How is it recorded if a fixed asset is donated to a VHWO to be sold, the proceeds of which will benefit ordinary operating expenses?

A

Assets are recorded in current fund (unrestricted or restricted)

The ultimate purpose of the assets is what counts

110
Q

What is the Custodian Fund?

A

The same as a university agency fund

111
Q

What is another name for the principal of an endowment?

A

Corpus

112
Q

What is the Loan and Annuity Fund?

A

Accounts for resources restricted/designated to making loans and/or annuity payments

Similar to university annuity and life income fund

FAR (26 decks)

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