Question 1

When a not-for-profit entity's funds are classified as restricted,who has imposed the restrictions?

Accepted Answer

Restricted funds are typically funds that have been designated by donors for a specific purpose or program. Therefore, it is the donors who have imposed these restrictions on the funds. The board of trustees of a not-for-profit entity may allocate these restricted funds to the specific programs or projects as per the donors' instructions. Bondholders and government regulators typically do not impose such restrictions on the funds of not-for-profit entities.

Question 2

Under which of the following circumstances would a not-for-profit organization's net assets be classified as temporarily restricted?

Accepted Answer

Net assets are classified as temporarily restricted when donors impose stipulations on the use of resources that expire with the passage of time or that can be fulfilled by actions of the organization. This means that the resources are only temporarily restricted and can be used for other purposes once the stipulations are met or the time period expires. In contrast, if resources must be held intact in perpetuity, they would be classified as permanently restricted, and if the organization's board imposes restrictions, they would be classified as temporarily restricted or unrestricted depending on the nature of the restrictions. The sinking fund requirement from a lender is not related to donor restrictions and would not result in the classification of net assets as temporarily restricted.

Question 3

For not-for-profit entities,external financial reporting focuses on:

Accepted Answer

Non-profit entities generally do not have a profit motive, and therefore external financial reporting typically focuses on the organization as a whole rather than individual or fund groups. Major funds may be disclosed in the financial statements, but the primary focus is on the overall financial health and performance of the organization.

Question 4

Ruth Richter gives a not-for-profit entity $25,000 in cash.She tells the entity that it may use the gift for particular research project but only after it receives at least $20,000 cash from other donors to help complete the project.If the entity fails to raise the additional $20,000,it must return Ruth's gift.What account should the entity credit when it receives Ruth's gift?

Accepted Answer

Ruth Richter's gift is conditional upon the entity raising an additional $20,000 from other donors. If the condition is not met, the entity must return the gift. Therefore, the correct accounting treatment is to recognize the gift as a refundable advance (deferred revenue) until the condition is met.

Question 5

A not-for-profit organization receives $3,400,000 of pledges in its annual telethon.When should the organization recognize contribution revenue?

Accepted Answer

According to accounting standards, not-for-profit organizations should recognize contribution revenue when the pledges are received, less an allowance for uncollectible pledges, as this represents the most accurate estimation of the revenue earned. Option A is incorrect as it does not take into account uncollectible pledges. Option B is incorrect as it does not consider the form of pledges. Option D is incorrect as it does not account for any restrictions placed on the pledges.

Question 6

Matt Shaw buys 100 shares of common stock for $8,000 in January.The value of the stock fluctuates in a narrow range (averaging $8,700)throughout the year.In November,when it has a value of $9,500,he donates it to a not-for-profit entity.On December 31,the stock has a fair value of $8,200.At what amount should the entity value the stock on its December 31 statement of financial position?

Accepted Answer

According to the valuation principle, assets should be reported on the financial statements at their fair value. Since the stock had a fair value of $8,200 on December 31, that is the amount at which the entity should value it on its statement of financial position. The original purchase price of $8,000 and the high point of $9,500 are not relevant for the valuation on December 31.

Question 7

In which classification of net assets are expenses reported?

Accepted Answer

Expenses are typically reported in unrestricted net assets because these funds are not subject to donor-imposed stipulations and can be freely used by the organization for its operational expenses.

Question 8

Which of the following characteristics of a brochure prepared by an NFPO is not relevant to whether the cost of the brochure can be allocated between program and fund-raising functions?

Accepted Answer

The page count of a brochure is not relevant to whether the cost can be allocated between program and fund-raising functions. The other characteristics, such as content, purpose, and audience, are all relevant in determining the allocation of costs.

Question 9

In response to a fund-raising campaign,an electric utility provides free electricity to a not-for-profit entity.How should the not-for-profit entity report this gift in its statement of activities?

Accepted Answer

The not-for-profit entity should report the gift of free electricity at its fair value as both revenue and an expense in its statement of activities. This reflects the contribution received (increasing revenue) and the utility expense incurred (increasing expenses), even though cash was not exchanged.

Question 10

A group of citizens donate their time to construct a building to provide shelter for the homeless,to be run by a not-for-profit entity.In this situation,what is the applicable accounting rule for recognizing the fair value of the services on the face of the financial statements?

Accepted Answer

According to the general rule of accounting, the fair value of contributed services should not be recognized unless the services require specialized skills, are provided by individuals who have those skills, and which the entity would need to be purchased if not donated. Therefore, option B is the applicable accounting rule in this situation. Option A is incorrect as the donations in the form of services can also be recognized under certain circumstances. Option C is incorrect as it applies to contributed assets rather than services. Option D is incorrect as it does not address how to recognize contributed services on the financial statements.

Question 11

The FASB requires not-for-profits to report net assets and resource inflows and outflows in which categories?

Accepted Answer

The FASB requires not-for-profits to report net assets and resource inflows and outflows in three categories: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. These categories depend on the existence and nature of donor restrictions. Therefore, option B is the correct answer. The other options are incorrect because they include categories that are not mandated by the FASB or include creditor and supplier restrictions, which are not part of the reporting requirements for not-for-profits.

Question 12

Steve Watson,a local certified public accountant (CPA),donates a significant amount of his spare time to Beth's Gallery,a not-for-profit museum.He donates 50 hours to audit the books and 80 hours selling products at the museum store.He charges his regular clients $200 an hour as a CPA.How should the Gallery report Mr.Watson's donation of time?

Accepted Answer

According to the Generally Accepted Accounting Principles (GAAP), only the fair value of donated services that are specialized or require specialized skills should be recognized as contribution revenue and expense. As Steve Watson is a CPA, his 50 hours of audit services would be considered specialized, and thus the fair value of those services ($10,000) can be recognized as contribution revenue and expense. However, the 80 hours of selling services would not be considered specialized and should not be recognized as contribution revenue and expense. Instead, the fair value of those services should be disclosed in a note to the statements. Therefore, the correct choice is to report $10,000 (50 hours @ $200) as contribution revenue and expense; also, disclose in a note to the statements the fair value of selling services provided by Watson and others.

Question 13

A not-for-profit entity conducts a special fund-raising campaign at the end of fiscal year 2012,intended to raise funds for general operations that take place during fiscal year 2013.It receives pledges totaling $200,000.Based on past experience,the entity expects to receive $150,000 in cash.How should the entity report these events?

Accepted Answer

The answer of A not-for-profit entity conducts a special fund-raising...

Question 14

Showing the amount and nature of donor-imposed restrictions on the statement of net assets helps financial statement readers to assess a not-for-profit organization's

Accepted Answer

Showing the amount and nature of donor-imposed restrictions on the statement of net assets helps financial statement readers to assess a not-for-profit organization's financial flexibility. Donor-imposed restrictions limit the use of the organization's resources. Therefore, disclosure of these restrictions allows readers to evaluate the organization's ability to use its resources to meet its operational needs and to respond to unexpected events.

Question 15

A not-for-profit organization enters into an agreement with a local bank to provide it with a letter of credit for a building project.The bank requires the organization to put aside 10% of pledges collected for the building project in a separate account as a good faith deposit for the line of credit.At year-end,the organization has $255,000 in this separate account.How should the $255,000 of net assets be classified?

Accepted Answer

The $255,000 should be classified as temporarily restricted net assets until the money is used on the building project. The restriction is specific to the building project, therefore it should be classified as temporarily restricted net assets until the project is completed.

Question 16

Which of the following financial statements is not required to be prepared by not-for-profit organizations?

Accepted Answer

Not-for-profit organizations are not required to prepare a statement of donations and contributions received. However, they are required to prepare a statement of financial position (balance sheet), a statement of activities (income statement), and a statement of cash flows as per GAAP.

Question 17

According to the Financial Accounting Standards Board,the distinguishing characteristics of not-for-profit organizations (NFPOs)do not include which of the following?

Accepted Answer

The distinguishing characteristics of NFPOs include operating for purposes other than to provide goods and/or services at a profit, receiving significant contributions from resource providers who do not receive proportionate value in return, and not having defined ownership interests that can be sold or transferred. The ability to issue debt on which the interest is exempt from federal taxation is a financial advantage that NFPOs have, but it is not a distinguishing characteristic.

Question 18

A not-for-profit organization receives a pledge from a donor in fiscal 2013.The terms of the pledge are such that the organization will receive a large contribution in fiscal 2015.At what value should the pledge be reported in the organization's 2013 statement of financial position?

Accepted Answer

The pledge should be reported at present value in the organization's financial statements. This is because the pledge is not received until future fiscal year(s), and the organization needs to reflect the time value of money in its reporting. Present value will reflect the current value of the pledge, considering the time value of money.

Question 19

The Turtle Island Singers receive three gifts during the year 2012: (a)$3,000,which may be used for any purpose at any time; (b)$5,000,which must be used for a special concert in a nursing home;and (c)$1,000,which may be used for any purpose,but only in the year 2013.When it receives the gifts,how should the entity classify them:

Accepted Answer

The $3,000 gift can be used for any purpose at any time, so it should be classified as unrestricted revenue. The $5,000 gift has a restriction that it must be used for a special concert in a nursing home, so it should be classified as temporarily restricted revenue. The $1,000 gift can only be used in the year 2013, but it has no other restrictions, so it should also be classified as temporarily restricted revenue. Therefore, the best choice is to classify $3,000 as unrestricted revenue and $6,000 as temporarily restricted revenue.

Question 20

Ken Labich promises to give a not-for-profit university $2 million for a new library,but only if the university is able to raise an equal amount in cash from other donors.When should the university recognize Ken's promise as revenue?

Accepted Answer

According to the principle of revenue recognition, revenue can be recognized when the conditions of an agreement are substantially met. In this case, Ken Labich's promise is contingent upon the university raising an equal amount from other donors. Therefore, the university should only recognize Ken's promise as revenue when it has received approximately $2 million in cash from other donors, which would fulfill the conditions set forth by Ken Labich. Option D is the best choice in this scenario.

Quiz 12: Accounting for Not-For-Profit Organizations