Unit 20 - NPO Financial Accounting and Reporting

Question 1

Under what condition will a company be allowed to use “operating profit” and to segregate its recurring items from its nonrecurring items in its statement of activities?

Answer 1

The NFP reports the change in net assets without donor restrictions for the period.

In its statement of activities, an NFP may use such classifications as
(1) operating and nonoperating,
(2) expendable and nonexpendable,
(3) recognized and unrecognized, and
(4) recurring and nonrecurring.

Furthermore, if an intermediate operating measure (e.g., operating income or operating profit) is used, it must be in a financial statement that at a minimum reports the change in net assets without donor restrictions.

Question 2

A complete set of general-purpose external financial statements issued by a nongovernmental not-for-profit entity must include

Answer 2

A statement of financial position as of the end of the reporting period, a statement of cash flows, and a statement of activities.

A complete set of financial statements of an NFP must include
(1) a statement of financial position as of the end of the reporting period,
(2) a statement of activities and a statement of cash flows for the reporting period, and
(3) accompanying notes.

Question 3

What are the major functional classes of expense for an NFP?

What are considered fundraising expenses?

Answer 3

The major functional classes of expenses for an NFP are program services and supporting activities. An analysis also must be presented that disaggregates functional expense classifications by natural expense classifications (e.g., salaries, interest, rent, and depreciation).

Supporting activities include
(1) management and general,
(2) fundraising, and
(3) membership-development activities.

Fundraising expenses include maintaining donor lists ($10,000). Soliciting members and dues and printing membership benefits brochures are membership-development activities.

Question 4

A nongovernmental not-for-profit entity borrowed $5,000, which it used to purchase a truck. In which section of the entity’s statement of cash flows should the transaction be reported?

Answer 4

In cash inflow from financing activities and cash outflow from investing activities.

The borrowing is a cash inflow from a financing activity because it results from issuing debt. The purchase of the truck is a cash outflow from an investing activity because it involves the acquisition of property, plant, or equipment or other productive assets.

Question 5

NFP - Contributions

NFP has received a $2,000,000 research grant from a government. NFP may retain the rights to the research and is permitted to publish the findings. However, NFP must (1) follow a certain protocol (regulations established by the government), (2) incur specified qualifying expenses, (3) forfeit unspent money, and (4) report the research findings to the government. This transfer of assets to NFP from a government is

Answer 5

A conditional contribution.

An exchange transaction is a reciprocal transfer in which each party receives and sacrifices approximately commensurate value. But the government (resource provider) does not receive commensurate value. NFP retains the rights to the research, and the government receives only an indirect benefit. NFP and the public receive the direct (primary) benefit. The transaction is a conditional contribution to the extent the assets are received before the condition is met. The agreement (donor stipulation) states a barrier that must be overcome before the recipient is entitled to the assets. This condition is deemed to exist because of certain indicators (e.g., a protocol to be followed and incurrence of qualifying expenses). They established that a barrier exists in the form of limits on the recipient’s discretion over the conduct of the research activity. Before the condition is substantially met (or explicitly waived), NFP recognizes a refundable advance (liability). After the condition is substantially met, NFP recognizes contribution revenue. The transfer of assets is then unconditional as well as voluntary and nonreciprocal.

Question 6

NFP - Investments

Assuming no contrary law or regulation, gains and losses on investments by an NFP should be included in the

Answer 6

Statement of activities as changes in net assets without donor restrictions.

An NFP’s statement of activities is equivalent to a for-profit entity’s income statement. Assuming no contrary law or donor stipulation, gains and losses, dividends, interest, and other investment income are reported when they occur in the statement of activities as changes in net assets without donor restrictions.