Weeks 1-3 Flashcards
Nonprofit Legal Entity Type
Corporation
Nonprofit Tax-Exempt Organization Classification
501(c)s
Nonprofit Types (3)
- Private foundations 501(c)3
- Public charities 501(c)3
- 501(c)1s through 501(c)27s
Private Foundations
501(c)3 organization. Individual/family/corporation endowed as a nonprofit to provide support to public charities.
501(c)1-27 organizations
Nonprofits that are tax-exempt, but for which donors do not receive a tax deduction. Includes civic organizations, business leagues, trade associations, labor unions, and social/recreational leagues.
Steps to seeking Nonprofit Status
- File for corporation status in any of the 50 states
- Create articles of incorporation and bylaws. File articles of incorporation with the state (following IRS guidelines)
- Once state has approved corporation status, request tax-exempt status with the IRS
- Receive IRS approval
Board of Trustees
Sets up and runs the committee structure within the board. Hires an executive director (which hires staff). Carries fiduciary responsibility to oversee the nonprofit.
Prudent Investor Rule
Protects trustees from personal liability in the case of investment loss, as long as errors in judgement were made in good faith
Budget Constraint Line
Maps possible combinations of 2 goods that are affordable given a customer’s limited income
Financial Statements for a For-Profit Organization (2)
- Balance Sheet
2. Profit & Loss
Financial Statements for a Non-Profit Organization (2)
- Statement of Financial Position
2. Statement of Activities (general/management, fundraising, and programs)
Breakdown of Nonprofit Activity Expenses (3)
- Management & General
- Fundraising
- Programs
Purpose of Nonprofit Organization
To fulfill a need or mission, and to serve its community. Requires transparency and accountability.
Purpose of For-Profit Company
To make a profit for its owners/shareholders
Nonprofit Net Asset Types (3)
- Unrestricted
- Temporarily Restricted
- Permanently Restricted
Unrestricted Net Assets (Nonprofit)
Assets & Donations that can be used for any purpose
Permanently Restricted Net Assets (Nonprofit)
Donated funds from which only the earnings can be used, not the principal
Temporarily Restricted Net Assets (Nonprofit)
Assets & Donations that are designated by the donor to be used for a specific purpose
Primary Accounting Difference between Nonprofits & For-Profits
Nonprofits show Net Assets on “equity” section of financial statements
For-Profits show Owners show Owner’s Equity on BS
Economic Entity Assumption (GAAP Assumption)
Assumes business functions/records are kept separate from owner’s personal financial transactions
Going Concern Assumption (GAAP Assumption)
Assumes business is to be in operation for a long time
Monetary Unit Assumption (GAAP Assumption)
Assumes a business will divide financial reporting records into artificial time periods
Cost Principle (GAAP Principle)
Requires that assets & liabilities be recorded at their acquisition price (regardless of FMV)
Revenue Recognition Principle (GAAP Principle)
Requires revenue to be recorded when it is earning and realized
Matching Principle (GAAP Principle)
Expenses must be recorded in the same period as the revenue associated with those expenses
Disclosure Principle (GAAP Principle)
Requires all companies to fully disclose information that may impact decisions (buy/sell/hold stock, for example) of users of financial information
Objectivity Principle (GAAP Principle)
Financial statements should be based on objective evidence
Materiality Principle (GAAP Constraint)
Significance of an item should be considered when it is reported. An item is considered significant when it would affect the decision of a reasonable individual.
Consistency Principle (GAAP Constraint)
Organization must use the same accounting principles and methods from period to period
Conservatism (GAAP Constraint)
When choosing between 2 solutions, the one which has the less favorable outcome is the solution which should be chosen
Cost Constraint (GAAP Constraint)
The benefits of reporting financial information should justify and be greater than the costs imposed on supplying it
Time Period (GAAP Assumption)
Assumption that statements are broken down into artificial time periods (quarter, year)
Cash Accounting
Recognize revenue when cash is received and expenses paid
Accrual Accounting
Recognize revenue when earned and expenses when incurred
Fund Accounting
Allows an organization to track how it’s using a pool of resources within a certain activity/group of activities. Allows donors to donate to a particular activity.
Form 1023
Tax-Exemption request form. Must be approved by the IRS to be a nonprofit organization.
