Not-For-Profit Entities

Question 1

What items do you need to know for the CPA Exam for governmental accounting?

Answer 1

• Contribution revenue
• Restrictions
• Financial statements

Governmental:

• Measure focus of basics of accounting
• Budgetary and encumbrance accounting
• Fund accounting
• Financial statements

Question 2

Knowledge check: A certified public accountant donates her time to prepare the annual tax for for a local not-for=-profit organization. The CPA also donated time to receive calls in the organizations annual telethon. The not-for-profit can record the CPAs time to prepare the tax forms and handling call in the telethon as contribution revenues-donated services?

Answer 2

False-

1) Time donated under the tax form (specialized skills) which were donated which could be contribution revenue
2) Answering phones does not require specialized skills therefore it does not get counted as contribution revenue.

Question 3

Knowledge check: A local philanthropist promises to donate $100,000 for a not-for-profit organization provided the not-for-profit can obtain matching funds. The board of the not-for-profit believes it will be difficult to obtain the matching funds. The organization should account for the promised donation as:

Answer 3

NO ENTRY- they haven’t received anything.

Question 4

Knowledge check: Excel City’s 20X7 property tax levy is $50,000,000. Based on prior years, two percent is estimated to be uncollectible. In record the property tax level, Excel should record $50,000,000 in property tax revenues?

Answer 4

False- Modified accrual accounting revenues are recorded net of the uncollectible amount.

Question 5

Knowledge Check: Citizen’s of Excel City approve a 1/2. cent sales tax to be used exclusively for mosquito control. The 1/2 sales tax collected by Excel City should be accounted for in:

A). General Fund
B) Special Revenue Fund
C) Private-Purpose Fund
D) InternalService Fund

Answer 5

B- Special Revenue Fund this is restricted revenue for a specific purpose

Question 6

Exam topics for Not-For-Profit entities?

Answer 6

• FASB
• Financial statements
• Support, revenues, and contributions
• Types of restrictions on resources
• Types of net assets
• Expenses including functional expenses
• Investments
• Hybrid organizations “Helathcare and universities”

Question 7

What are the four types of NPO?

Answer 7

1) Voluntary Health & Wellfare- FASB
2) Other NPO- FASB
3) Healthcare (Government- GASB)
4) Colleges and Universities (Government- GASB)

Examples of voluntary health and welfare organizations: provide low-cost services with financial support from voluntary grants (united way, Red Cross, boy scouts, make a wish)

Not for profit: Benefit members (libraries, religious organizations, etc.)

Question 8

What is the purpose for NFP financial reporting?

Answer 8

Stewardship- how managers fulfill their stewardship responsibilities and other aspects of their performance

Service and sustainability- Services provided and the ability of the organization to continue to provide those services.

Question 9

The FASB adopted a NET ASSET MODEL for financial reporting by not-for profit organizations, what does this mean?

Answer 9

Report on Net Assets in two categories based on type of restriction:

1) Net assets without donor restriction
2) Net assets with donor restrictions

Question 10

What are the required financial statement for a NPO?

Answer 10

Statement of financial position

Statement of activities

Statement of cash flow

Question 11

Under the statement of actives, reporting expenses should be reported by:

Answer 11

1) Nature (Salaries)
2) Function (Programs)

They could report in the statement of actives

In the notes to the financial statements

In a separate financial statement

Question 12

Under the statement of financial position, what must be reported?

Answer 12

Assets

Liabilities

Net Assets

• Without donor restriction
• With donor restriction
• Total net assets

Question 13

What must be reported on the statement of activities?

Answer 13

1) Revenues and gains reported by sources of each net asset category
2) Expenses- Only in net assets without donor restrictions reported by function and nature
3) changes in classes of net assets reported separately

Question 14

How are revenues reported on the statement of activities:

Answer 14

Reported at gross,

Revenues are reported in net asset categories with donor restrictions or without donor restrictions

Question 15

How are expenses reported on the statement of activities:

Answer 15

Two categories: With restrictions without restrictions

Two functional categories:
Program services- related to the primary mission of the organization

Supporting activities- do not directly relate to the primary mission (e.g. management, general admin, fundraising)

Question 16

The statement of cash flows, what are the categories?

Answer 16

Operating section: Direct or indirect method
*If the direct method is used they no longer require a reconciliation

Investing actives:

Operating Activities

Question 17

Guaranteed question: ALL NPO which report under FASB must report expenses by nature and function?

Answer 17

True! All must report expenses by nature and function in the statement of activities, notes to the financial statements, or in a separate financial statement.

Question 18

What are program services and where are they reported?

Answer 18

Statement of activities, expense:

Program service- related to the major mission of the organization

Activities that result in goods and services provided by the organization.

Supporting Activities: Management, fundraising

Question 19

what are examples of primary activities?

Answer 19

• Milage
• Employee benefits
• Supplies

Question 20

What is a contribution?

Answer 20

1) Unconditional- If there is a condition, wait for it to be met
2) Nonreciptorcal- If reciprocal it is an exchange transaction
3) Voluntary
4) Not an ownership investment

Question 21

What is a condition?

Answer 21

A condition is a barrier to overcome and either

1) A right to return the asset transferred
2) A right to release the promise

Example of a barrier:

1) Measurable performance-related barrier
2) Limited discretion
3) Purpose stipulation

Question 22

What are types of contributions:

Answer 22

1) Pledges (may include a condition or restriction)

Question 23

How do restrictions affect contribution revenue?

Answer 23

Restrictions effect WHERE it is recognized not when it is recognized.

1) Unrestricted Support
2) Temporary restricted
3) Permanent restricted

Question 24

If you receive a contribution with a restriction how is this recorded on the financial statements?

Answer 24

Wait for the restriction to be met (liability if the funds were received before the condition has been met)

If it is unconditional with a restriction, you can book the revenue with a restriction.

Question 25

How would you record a $2,500 gift without any restrictions or conditions?

Answer 25

Cash. $2500

Contribution without donor restriction. (2500)

Question 26

If NPO received $8,000 with conditions, how would this be recorded?

Answer 26

Cash. $8,000

Unearned Contribution. ($8,000)

Question 27

NPO receives $1M with permanent restrictions, how would this be recorded?

Answer 27

Cash. $1,000,000

Contribution- with donor restriction. ($1,000,000)

Question 28

Donor imposed time restriction exception: A time restriction met in the same period as the donation can be treated as NOT HAVING A TIME RESTRICTION?

Answer 28

TRUE

Question 29

A donor imposed purpose restriction with limits to the use of the contribution asset. Example: $40,000 was received for research on the migration of eagles.

Subsequent: $20,000 as spent on the research:

Answer 29

Initial entry:
Cash. $40,000
Contribution- with donor restriction. $40,000

Expense- Net Assets without donor restrictions $20,000
Cash. ($20,000)

• Remember: Remember for NPO reporting, all expenses appear as net assets without donor restrictions

Reclassification:   
Reclass Out- Net Assets with donor restriction.  $20,000 
Reclass In- Net assets without donor rest.   ($20,000)

Question 30

Someone donates $500 dollars in office supplies, how would this be recorded?

Answer 30

Inventory- Office Supplies. $500

Net assets without restrictions. ($500)

Question 31

What is variance power?

Answer 31

Where a NPO receives funds as an INTERMEDIARY and must transfer to other beneficiaries (AKA, the NPO is a go-between). Variance power determines whether they can recognize revenue or not.

NPO can recognize revenue. IF the organization has unilateral right to redirect use of assets to parties other than the specified beneficiary. If that power is not there, then they would recognize a liability.

Example: A donor donates money for the Wilson families who home just burned to the ground. The money is to go to the Wilson family. –> Because it is a specific family and the Red-Cross doesn’t have control on where the money can go, it is a liability. If a donor donated to a random family and red-cross could pick and choose how the money was to be allocated, then it would be revenue.

Question 32

With respect to donations or collections of an NPO, the NPO can choose NOT to capitalize the asset IF:

Answer 32

1) Held for public exhibition
2) education
3) research rather than financial gain

If they don’t meet the criteria, you have to capitalize.

Question 33

Donated services are reported as an expense and revenue if:

Answer 33

1) Services require specialized skills
2) Person possesses those skills
3) Value can be measured
4) Entity controls the employment and duties of the service donor

Question 34

Pledges (Promises to Give)

Answer 34

Conditional pledges- wait for condition to be met

Unconditional pledges- Recognize in period they are made

Question 35

What are the three types of regular endowments?

Answer 35

1) Quasi- Created by the board not an external party
2) Term
3) Board designated

Question 36

What are endowment?

Answer 36

Permanent restriction from an external party. Earnings off the endowment are unrestricted.

Question 37

What is an underwater endowment?

Answer 37

The FV is less than the original amount. You have to report this amount as net assets with donor restrictions.