Question 1

Hospitals,colleges and universities,voluntary health and welfare organizations,and other not-for-profit organizations all follow the same standards for recognition of revenues and expenses.

Accepted Answer

Each of these organizations may have different standards for revenue and expense recognition, particularly if they are governmentally owned or affiliated. In fact, some public colleges and universities recognize expenditures, not expenses. It is true, however, that all nongovernmental entities of these types, those subject to FASB jurisdiction, report support, revenues, and expenses on a similar basis for external financial reporting purposes.

Question 2

Not-for-profit organizations should be conservative and record pledges as support (contributions)only when received in cash.

Accepted Answer

NPOs that follow generally accepted accounting principles will use accrual accounting. Pledges should be recorded as receivables and support in the year received. An allowance should be established for estimated uncollectible pledges, if deemed necessary. Contribution revenue (i.e., support) should be reported in the statement of activities in the appropriate section, as a change in either unrestricted, temporarily restricted, or permanently restricted net assets.

Question 3

Supporting services expenses include fund-raising and management and general expenses that are not directly attributable to specific programs.

Accepted Answer

This is the classification scheme illustrated and discussed in Chapter 14.

Question 4

The statement of activities for an NPO must be prepared exactly as prescribed by the Financial Accounting Standards Board in SFAS No.117.

Accepted Answer

SFAS No. 117 allows considerable discretion in presenting the statement of activities as long as changes in all three net asset classes are displayed: unrestricted, temporarily restricted, and permanently restricted.

Question 5

Investments should be recorded at cost,or in the case of donated investments,at fair value as of the date of the gift.On subsequent balance sheets investments should be marked to and reported at market value with the valuation method disclosed and consistently followed.

Accepted Answer

SFAS No. 124 requires that investments be marked to fair value whenever financial statements are presented. Unrealized gains and losses are reported on the statement of activities. In general, the accounting treatment of investments is similar to that of for-profit organizations (under SFAS No. 115) and governmental entities (under GASBS 31) although differences do exist.

Question 6

Donated materials are seldom recognized as a contribution and as an expense by a not-for-profit organization.

Accepted Answer

Although SFAS No. 116 criteria for recognizing revenue for donated materials are somewhat restrictive and limit the recognition of donated materials by not-for-profit organizations, many NPOs do report donated materials. Guidance in the AICPA Audit and Accounting Guide Not-for-Profit Organizations suggests that donated materials (gifts-in-kind) should be recorded as contributions and as expenses (supplies expense or cost of goods sold) at fair value on the date of the gift if an objective, clearly measurable basis for fair value can be established.

Question 7

SFAS No.117 requires that support from special events,if related to the central ongoing and major activities of the organization,and related direct costs,be reported at their gross amounts in the statement of activities rather than reporting the special events support net of direct costs.

Accepted Answer

However, netting direct costs against special events support is permitted if the special events are of a peripheral or incidental nature.

Question 8

All not-for-profit organizations covered by the AICPA Audit and Accounting Guide Not-for-Profit Organizations are under the standards-setting jurisdiction of the FASB.

Accepted Answer

It is true that the FASB has standards-setting jurisdiction for nongovernmental not-for-profit organizations (which is probably a majority of such organizations); however, many not-for-profit organizations (museums, cemeteries, libraries, etc.) are operated by or supported by governments. For these organizations the GASB is assigned primary standards-setting responsibility. To date, the GASB has issued two statements applicable to governmental not-for-profit organizations, GASBS 20 and GASBS 29. These statements permit governmental NPOs that use proprietary fund accounting to either follow all applicable FASB pronouncements or only those FASB pronouncements issued before November 30, 1989, providing they do not conflict with GASB standards.

Question 9

Expense amounts by natural classification can be determined from the statement of functional expenses,as can the expense amounts for program services and supporting services categories.

Accepted Answer

The statement of functional expenses provides totals both for natural expense classifications (object-of-expenses) and program services and supporting services classifications, although the statement is only required for VHWOs.

Question 10

Museums and religious organizations must capitalize and report in their balance sheets assets such as works of art,historical treasures,historical archives,and similar collectible items if they are held for public inspection.

Accepted Answer

Current standards do not require balance sheet reporting of such collectible items that are held for public inspection since the conventional wisdom is that reporting a dollar value would not provide useful information to the readers of financial statements. NPOs can choose nonrecognition but only if the items are added to collections and meet SFAS No. 116 conditions explained in Chapter 14 under the heading "Collection Items", for example, when collections are being held in the public interest rather than to achieve a financial gain from trading the collectible items.

Question 11

Depreciation expense is reported in the statement of activities prepared by nongovernmental,not-for-profit organizations.

Accepted Answer

Depreciation expense is reported in the statement of activities and allocated among the program services and supporting services expense categories to which it applies, rather than reported as a separate item on its own line.

Question 12

A statement of functional expenses is not required of all voluntary health and welfare organizations.

Accepted Answer

Other nongovernmental NPOs should show expenses by function, but do not need to prepare a statement of functional expenses.

Question 13

A voluntary health and welfare organization (VHWO)is a type of NPO that depends primarily on charges for services as a source of revenue,rather than on contributions from the public at large and provides health and welfare services to the public for a nominal or no fee.

Accepted Answer

The definition of voluntary health and welfare organizations is one that depends primarily on contributions from the public at large and provides health and welfare services to the public for a nominal or no fee. These organizations are sometimes called human service organizations.

Question 14

The statement of financial position prepared by a nongovernmental NPO presents net assets in these categories: unrestricted; temporarily restricted; invested in capital assets,net of related debt; and permanently restricted.

Accepted Answer

Nongovernmental NPOs must report only the three net asset categories required by SFAS No. 117: unrestricted, temporarily restricted, and permanently restricted. The category of capital assets, net of related debt is found in governmental entities that follow GASB standards.

Question 15

Under current accounting and reporting standards nongovernmental,not-for-profit organizations (NPOs)must utilize the fund accounting structure set forth in the AICPA Audit and Accounting Guide Not-for-Profit Organizations.

Accepted Answer

Most NPOs are nongovernmental in nature and are therefore subject to SFAS No. 116 on contributions and SFAS No. 117 on financial statement display. SFAS No. 117 neither requires nor precludes the use of fund accounting; however, many NPOs continue to voluntarily use fund accounting for internal management and accountability for restricted purposes, such as grants. The AICPA Audit and Accounting Guide on NPOs provides guidance for optional fund accounting.

Question 16

NPOs are required to prepare a statement of cash flows.

Accepted Answer

A statement of cash flows is one of the basic financial statements required by SFAS No. 117 for all nongovernmental not-for-profit organizations and by GASBS 9 for governmental not-for-profit organizations that use proprietary fund accounting.

Question 17

Donor-imposed restrictions must be clearly reflected in financial statements of not-for-profit organizations.

Accepted Answer

Not-for-profit organizations that prepare financial statements in conformity with FASB standards are required to report net assets in three categories: unrestricted, temporarily restricted, and permanently restricted.

Question 18

Cash received by a nongovernmental NPO in year 1 that the donor stipulates is to cover operating expenses of the following year should be recognized as an "increase in temporarily restricted net assets" in year 1 and as "net assets released from restrictions" in year 2.

Accepted Answer

This approach results in matching the operating resources (net assets released from restrictions) and the related expenses that both affect unrestricted net assets in the same fiscal year, year 2. The contribution is reported in the statement of activities for year 1, under the caption "changes in temporarily restricted net assets." Year 2 will show a decrease in temporarily restricted net assets and an increase in unrestricted net assets in equal amounts.

Question 19

Donated services should be recorded as contributions by a nongovernmental,not-for-profit organization if material,and if they meet the criteria set out in SFAS No.116.

Accepted Answer

Donated services are recorded as contributions and as expenses only when the service is one that meets the SFAS No. 116 criteria discussed in Chapter 14 under the caption "Donated Materials and Services." Services must create or enhance nonfinancial assets (such as a carpenter constructing a building), or be provided by individuals possessing specialized skills that typically would need to be purchased if not provided by donations (e.g., accountants or lawyers).

Question 20

Contributions received in a prior period and restricted by the donor for construction of a building were reported as increases to "temporarily restricted net assets" in the period received.When the building is constructed in a subsequent period an NPO would report "contributions" for the amount released from restrictions.

Accepted Answer

The cost of the constructed building would be reported in the statement of activities as "net assets released from temporary restrictions," rather than again as "contributions." If it is the NPO's policy to consider all building and equipment acquisitions as temporarily restricted, then the restriction will be released over time as depreciation is recorded.

Quiz 14: Not-For-Profit Organizations Regulatory, taxation, and Performance Issues