Test #2

Question 1

Interesting Money

Answer 1

• Interesting money is the kind of investment return that lures you toward higher risk options and away from risk free saving instruments like certificates of deposits and US Treasury Bills
• Work and risk are two reasons that a business must make interesting money.
• Interesting money in sense of NPO’s is the measurement of how effectively NPO managers carry out the mission of the organization with their efficiency in accomplishing the mission.

Question 2

The 4 things that accounting concerns itself with

Answer 2

Substantiating
Measuring
Recording
Reporting

Question 3

Debit (one word definition)

Answer 3

left

Question 4

Credit (one word definition)

Answer 4

right

Question 5

table

Answer 5

just study the table

Question 6

What are the two different financial statements

Answer 6

For Profit:
Balance Sheet
Income Statement
Statement of Changes in Equity
Cash Flow Statement
Footnotes

Not-for-profit
Statement of Financial Position
Statement of Activities
Cash Flow Statement
Footnotes

Question 7

Accounting Cycle

Answer 7

Steps
- execute a TRANSACTION
( this generates Evidence)
- RECORD transaction in a Journal
- POST each line of each journal entry to its account in the General Ledger)
- Run a TRIAL BALANCE at the end of accounting period
- Prepare FINANCIAL STATEMENTS from the trial balance
- CLOSING ENTRY at the end of the fiscal year.

Question 8

Audit Trail

Answer 8

The accounting cycle in reverse.

Question 9

Why is it important for managers to understand the Accounting Cycle and the Audit Trail?

Answer 9

The Accounting Cycle and Audit Trail provide a good road map on how to do the accounting process correctly. It’s important for managers to make sure they are following the steps correctly to ensure that the numbers that end up on their financials represent their business fairly.

Question 10

What are the 3 sections of the Cash Flow Statement?

Answer 10

1. Cash flows from Operating activities
2. Cash flows from Investing activities
3. Cash flows from Financing activities

Question 11

What does capitalization mean?

Answer 11

If you debit an Asset account, you are capitalizing the expenditure of money.

Example: Accounting’s definition of an Asset is a bundle of future economic benefits. If you buy a car, you would debit an Asset account because a car will provide you with a future benefit of prolonged use. You can “capitalize” this expenditure because it fits the definition of an Asset.

• (Some people try to falsely capitalize expenditures that they should be expensing in order to keep debits out of the expense accounts and therefore off the Income Statement)
• (Non-profits sometimes do the opposite to understate their net income)

Question 12

What are Arms Length Transactions?

Answer 12

A business transaction in which the parties involved are not related but have equal bargaining stances against each other.

Question 13

What are Related Party Transactions?

Answer 13

A business transaction that involves parties that have some form of unusual persuasion at play.

Question 14

What are Net Assets?

Answer 14

Assets - Liabilities = Net Assets

We use Net Assets in non-profit accounting in place of “equity” which is the term used in for-profit accounting. This is because “equity” implies ownership and non-profits do not have any “owners”

Question 15

What are the 3 ways in which we can use financial information?

Answer 15

1. Ratio Analysis (within a period)
2. Trend Analysis ( from period to period)
3. Comparison within industry averages

Question 16

What are the 3 classifications of Net Assets?

Answer 16

1. Permanently Restricted (Endowments)
2. Temporarily Restricted (Grants)
3. Unrestricted ( Generic donations)

Question 17

List three Watchdog organizations.

Answer 17

1. Better Business Bureau
2. American Institute of Philanthropy
3. Charity Navigator

Question 18

What do Watchdog organizations set as a standard amount that non-profit organizations should be spending on program service?

Answer 18

At least $0.60 - $0.65 (depending on the organization) of every dollar should be going to program service expenses

Question 19

What are the three types of spending listed on the 990 for non-profit expenditures?

Answer 19

1. Program Service Expenses
2. Management and General Expenses
3. Fundraising Expenses