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CHAPTER 18ACCOUNTING FOR NOT-FOR-PROFIT ORGANIZATIONS
Chapter Outline
I. Historically, the financial reporting for private
not-for-profit entities have differed significantly according to
the type of organization (such as a health care center versus a
college or university). The reporting of these entities is now
standardized considerably by FASB pronouncements that focus on the
reporting of contributions and the financial statements to be
issued. However, public colleges and universities and similar
organizations still must follow the standards issued by the GASB.
A. This chapter looks at the financial reporting for private
not-for-profit organizations. The
FASB has placed the emphasis on the entity as a whole rather
than on the individual funds.
B. Reporting for these organizations should be similar to a
business entity unless a critical difference exists that impacts
the needs of the financial statement users. Several critical
differences can be identified such as:1. Many private
not-for-profit organizations receive a significant amount of
their
financial resources from contributions rather than from revenues
or capital investments.
2. Some of the resources given to a not-for-profit organization
include donor-imposed restrictions.
3. No single indicator of success is present such as net income
provides for a for-profit business entity.
II. The FASB has established the following financial statements
for a private not-for-profit organization.
A. Statement of Financial Position reports assets, liabilities,
and net assets.B. Statement of Activities and Changes in Net Assets
reports revenues, expenses, gains,
and losses.C. Statement of Cash FlowsD. A voluntary health and
welfare organization is also required to present a Statement of
Functional Expenses which indicates the allocations of resources
to program services (to meet the goals of the organization) and
supporting services (to operate the organization and raise
funds).
III. For reporting purposes, the economic resources of a private
not-for-profit organization must be classified within one of three
categories.A. "Unrestricted net assets" indicates the amount of an
entity's resources that are not
subject to external donor restrictions; officials of the
organization can make whatever use they wish of these assets.
B. "Temporarily restricted net assets" are restricted by an
outside party (often a donor) for a particular use or for use in a
future period of time. When the restriction is satisfied, these
resources are switched to unrestricted net assets. Thus, on the
statement of activities and changes in net assets, temporarily
restricted net assets are shown as
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being reclassified as unrestricted net assets when the
appropriate time has passed or the resource is used as
stipulated.
C. "Permanently restricted net assets" are expected to remain
restricted for as long as the organization exists. Income from
these assets is normally unrestricted or temporarily restricted
based on the specifications of the donor.
IV. Contributions should be recognized as revenues when
received.A. Restricted contributions are recognized as revenue
either within temporarily restricted
net assets or permanently restricted net assets.B. Donated
assets are recorded at fair market value. Recognition of art works,
historical
treasures, and the like is not required if three conditions are
all met.1. The items are added to a collection for public
exhibition, education, or research.2. The items are protected and
preserved.3. If sold, receipts must be used to acquire other
collection items.
C. Unconditional promises to give that are received from a donor
by a private not-for-profit organization should be reported
immediately as both a receivable and a revenue.1. If not to be
collected within one year, the promise is recorded at the present
value
of the future cash flows. Subsequent amortization is recorded as
contribution revenue.
2. Estimated uncollectible balances are also deducted.3.
Conversely, conditional promises are not recognized until the
conditions are met.
D. Services contributed to a not-for-profit organization should
be recognized as a revenue if the services (1) create or enhance a
nonfinancial asset or (2) require a specialized skill possessed by
the donor and would be purchased if not donated.
E. If a not-for-profit organization accepts a donation that must
be conveyed to a separate individual or other beneficiary, the
organization normally records the asset along with an accompanying
liability. However, if the organization is given variance powers to
change the beneficiary, a revenue is recognized instead of a
liability.
V. Historically, not-for-profit organizations have been
permitted but not required to report depreciation.A. In 1987, the
FASB ordered the recognition of depreciation by all
not-for-profit
organizations. At that time, governmental not-for-profit
organizations, such as public colleges and universities, had to
follow FASB pronouncements unless prohibited specifically by the
GASB.
B. The GASB responded to the FASBs standard in order to permit,
but not require, public schools to report depreciation.
C. As a result of this controversy, a GAAP hierarchy has been
created to identify which standards are more authoritative for each
type of organization.
D. GASB 35 now requires public colleges and universities to
follow GASB 34. Consequently, two sets of reporting standards have
come to exist, one for private not-for-profit organizations and
another for public. Many public schools simplify the reporting
process by identifying themselves as solely an Enterprise Fund (an
activity open to the public for a charge). Because fund-based
statements and government-wide statements are virtually identical
for proprietary funds (such as an Enterprise Fund), the entity only
has to report fund-based statements.
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VI. Education institutions record tuition revenue at gross
amount billed and show revenue net of scholarships and financial
aid in the Statment of Activities
VII. Health care organizations exhibit some unique reporting
features that must be addressed in not-for-profit accounting.A.
Third-party payors such as Medicare and insurance companies have
had a significant
impact on the reporting process because of their need for usable
financial informationB. A net patient service revenue figure is
actually reported by these organizations but only
after reduction for contractual adjustments. These adjustments
are decreases allowed for some third-party payors based on the
approved cost for a particular service in that geographic
region.
C. Services to indigents are not included in receivables or
revenues.
Learning Objectives
Having completed Chapter 18 of this textbook, "Accounting and
Reporting for Private Not-for-Profit Organizations," students
should be able to fulfill each of the following learning
objectives:
1. List the three financial statements that must be produced by
a private not-for-profit organization and the various types of
accounts to be reported on each.
2. Identify the three types of net asset categories reported by
a private not-for-profit organization.
3. Produce a statement of financial position and a statement of
activities for a private not-for-profit organization and list the
types of account balances reported in each of these statements.
4. Identify the purpose of a statement of functional expenses
and the type of organization that must present this particular
statement.
5. Differentiate between program service expenses and supporting
service expenses and indicate why that distinction is
important.
6. Describe the controversy that arose between the FASB and the
GASB over the recording of depreciation by not-for-profit
organizations as well as the resolution of that issue.
7. Explain the purpose of the GAAP hierarchy.
8. Identify the various ways that gifts are recorded if they are
made to a not-for-profit organization but must eventually be
conveyed to another individual or beneficiary.
9. Explain the allocation of joint costs incurred in mailing
fund-raising literature along with other information.
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10. Explain the problem of accounting for gifts of art works and
historical treasures as revenues and identify the criteria that
must be met for recognition to be avoided.
11. Indicate the appropriate method of accounting for
unconditional promises made to a private not-for-profit
organization for future donations.
12. Identify the criteria that must be met for contributed
services to be recognized by a private not-for-profit
organization.
13. Define a contractual adjustment and explain its impact on a
health care organization.
Answers to Discussion Questions
Are Two Sets of GAAP Really Needed for Colleges and
Universities?
Over the last few years, a number of differences have appeared
between the accounting for public colleges and universities and for
those that are private. According to the GAAP hierarchy, the FASB
has authority over private educational institutions whereas the
GASB holds authority over the reporting of public schools.
Consequently, statements of the FASB do not apply to pubic schools
unless specifically made applicable by the GASB. FASB
pronouncements on depreciation, pledges, contributions, and
financial statement format for not-for-private organizations do not
affect public schools until and unless so stated by the GASB.
Because of this split, the financial statements for these two
types of schools have developed several significant, unique
differences. GASB 35 has now stated that public schools must follow
the guidelines of GASB 34 which created financial statements for
state and local governments. However, these new guidelines are not
as radically different from private schools as might be first
imagined. GASB 35 allows public colleges and universities to label
themselves as solely Enterprise Funds if they meet required
criteria. If this decision is made, the school can report only
fund-based financial statements as would be produced by a
proprietary fund. These statements have some resemblance to the
statements prepared by private schools.
However, important distinctions do continue to exist. Students
can be asked to address the question of whether a public and a
private school need to have comparable financial statements. Net
income is not an issue, rather the sources and utilization of
resources is usually emphasized. Is the adoption of a single set of
generally accepted accounting principles necessarily essential? A
reader might prefer one technique but will a decision-maker
actually be impacted if the University of Virginia does not report
pledges and Southern Methodist University does? Will a
decision-maker care if the University of North Carolina at Chapel
Hill has one statement format but Duke University has another?
This approach to this controversy leads to the important
question of user needs. Why does a company or individual look at
the financial statements of a college or university? Donors might
have one answer to that question while creditors could have an
entirely different response. Once that question has been addressed,
the need for comparability is easier to assess. No ultimate answer
for that query currently exists but the students can be asked to
develop their own list of user needs and then note whether the
existence of two different sets of GAAP has an adverse impact on
those needs.
Is This Really an Asset?
In theory, accounting for a pledge is a relatively
straightforward process. A receivable is established (at present
value if not to be received for a year) along with an adequate
allowance for doubtful collections. However, in practice, the
process might be much more
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complicated. In this case, for example, was a pledge actually
made or was this just a superfluous statement spoken at a moment of
overwhelming emotions? Is this a promise to give or an intention to
give? Can the donor change his mind? Does this potential donor
really own land in Idaho and can it be sold for $15 million? How
can an adequate allowance be determined for this pledge? If the
indivdiual's mother should die, would he lose interest in
supporting the hospital? If the $5 million is reported as a
receivable and then is not collected, what is the impact on the
readers of the financial statements? How much time and energy
should the hospital invest in attempting to arrive at a proper
method of financial reporting? The accountant must address all of
these questions (and more) to determine the appropriate accounting
treatment.
At a minimum, hospital officials need to contact this donor and
have a long discussion. He needs to understand their reasons for
attempting to establish a valuation of this promise. In class
discussion, students can be asked to identify questions that should
be posed to this person. They would probably include the
following:
Does he really plan to give $5 million to the hospital?When does
he project that the land will be sold and the gift made?How did he
establish a $15 million price? Could the land be sold for less and,
if so, how
will that impact on the gift to the hospital?How does he want
the $5 million to be used?Is there any chance that he will change
his mind?What other charities has he supported? Has he previously
made such large gitfs?Would he be willing to furnish financial
statements as well as a list of references who
could verify his intentions and his ability to carry out those
intentions?Does the hospital have legal recourse for the promise
that is in writing and signed?
If this individual has supported other charities over the years,
is committed to the work of Mercy Hospital, has adequate financial
resources, and if the land appears to be worth $15 million, the
hospital should report the pledge as a receivable. However, a large
allowance should probably still be established simply because of
the uncertainties involved with this amount of money over an
extended period of time. Conversely, if too much uncertainty exists
(a value for the land cannot be determined or the gentleman refuses
to give information about his ability to meet this commitment), the
hospital may decide that this is not a pledge at all but merely the
promise of a possible future pledge the donor intends to give. In
that case, the information should be adequately spelled out in a
footnote.
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Answers to Questions
1. The Financial Accounting Standards Board (FASB) has authority
for establishing accounting standards for private not-for-profit
organizations. In addition, audit and accounting guides produced by
the AICPA provide further guidance for the preparation of financial
statements.
2. If a user of the financial statements is a potential donor,
that company or person is interested in assessing whether a gift to
a not-for-profit organization is a wise use of resources. To make
that assessment, the individual needs to know whether the
organization uses its resources appropriately to achieve its stated
goals. In this way, donors can decide which organization deserves
to receive support and how much will be donated.
If a user of financial statements is a creditor, that company or
person is primarily interested in whether the organization can
generate sufficient cash flows to pay its debts as they come
due.
3. According to FASB Statement 117, three financial statements
are required to be produced by private not-for-profit
organizations: a statement of financial position, a statement of
activities and changes in net assets, and a statement of cash
flows. A voluntary health and welfare organization must also
produce a statement of functional expenses.
4. Temporarily restricted assets have been restricted by an
external donor for a specified use or for use at a future point in
time. For example, cash might be given that had to be used to buy a
bus for the organization or that could not be spent for three
years. Such restrictions are eventually lifted when the intended
usage is fulfilled or when the time limit has been met.
5. Permanently restricted assets have been restricted by an
external donor and that restriction is expected to last for as long
as the organization continues to function. Normally, any income
generated by these assets can be used by the organization although
its specific usage may be restricted. For example, investments
could be given to a private not-for-profit organization that could
never be spent. However, the income produced by these investments
might be designated by the donor for the purchase of computer
equipment or might be available to the organizations officials for
whatever purpose they deemed necessary.
6. Private not-for-profit organizations report (a) program
service expenses and (b) supporting service expenses. Program
service expenses are those that relate to the goals and objectives
of the organization. Supporting service expenses encompass the
costs of operating the organization and raising funds.
7. Not-for-profit organizations are frequently evaluated based
on the ratio of program service expenses to total expenses. This
ratio tells the readers of the statements what portion of each
dollar of expense can be attributed to achieving the goals of the
organization.
8. A statement of functional expense is produced by a voluntary
health and welfare organization to assist the reader of the
statements in measuring the efficiency of the organization in using
its resources. The assumption is that an entity should use a
greater
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portion of its resources for its stated goals and a smaller part
for administrative costs and fund raising. This statement provides
a simple way of evaluating these organizations in comparison to one
another.
9. Over 15 years ago, the FASB created an official statement
that required all not-for-profit organizations (public as well as
private) to report depreciation expense. Previously, the recording
of depreciation had been optional for such organizations. At that
time, FASB statements applied to public not-for-profit
organizations unless specifically excluded by the GASB. In this
case, the GASB had to stop its normal deliberations and begin to
analyze this issue (and pass a statement making depreciaton
optional once again for public not-for-profit organizations). Thus,
the GASB was in a position of having to respond almost immediately
to any action taken by the FASB that might affect public
not-for-profit organizations. The Financial Accounting Foundation
studied this problem and proposed that the FASB be given
jurisdiction for all not-for-profit organizations with GASB in
charge of the accounting for state and local governments. However,
the threat by a number of government accounting organizations to
cease helping to fund the GASB forced the FAF to return to the
original structure. To help resolve this problem, the AICPA created
a GAAP Hierarchy to provide guidance as to the applicability of
accounting standards. Under this ranking, FASB statements only
apply to public not-for-profit organizations if they are made
applicable by the GASB. At the current time, the FASB is in the
process of reissuing the hierarchy for nongovernmental entities in
order to put it within its jurisdiction.
10. As indicated in the previous answer, the GAAP Hierarchy is a
ranking system created originally by the AICPA to indicate the
relative authority of various accounting standards. Thus, when two
or more sources of accounting guidance are in disagreement, the
GAAP Hierarchy indicates which has the greater authority. The GAAP
Hierarchy was created because of the controversy between the FASB
and the GASB as to the reporting of depreciation expense by
not-for-profit organizations.
11. When an organization conveys a gift to a private
not-for-profit organization (such as the United Way) that must be
conveyed to a separate beneficiary, a question is raised as to the
recording of the expense and the contribution revenue. Under normal
circumstances, the original donor records an expense at the time of
the gift while the charity reports both an asset and a liability
until conveyed to the beneficiary. At the same time, the eventual
beneficiary should record a receivable and a contribution
revenue.
12. If a donor makes a contribution to a charity for conveyance
to a separate beneficiary but can revoke or redirect the gift, the
donor records a receivable (rather than an expense) until the gift
is actually conveyed to the beneficiary. At that point, the
receivable is reclassified as an expense. The charity shows a
liability but, in this situation, it is directed to the donor and
not to the beneficiary. Because the beneficiary is not completely
certain of receipt of the gift, no recording is made until
received. The donor has retained a significant degree of control
which impacts the method by which the gift is reported.
13. If a donor makes a contribution to a charity for conveyance
to a separate beneficiary but grants it variance powers to change
the identity of the beneficiary, the donor reports an expense
immediately. However, since control of the gift now lies with the
charity, it should record a contribution revenue instead of a
liability. The beneficiary makes no entry until the gift is
received because of the uncertainty involved. Here, the charity
records both a revenue and, eventually, an expense for the
contribution even thought it was not the original donor.
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14. The value of donated services is recognized by a private
not-for-profit organization if the service being performed (a)
creates or enhances a nonfinancial asset (such as adding a room to
a building) or (b) requires a specialized skill possessed by the
donor that would have been purchased by the organization except for
the gift. An example of this second criterion would be the donation
of medical services by a surgeon to a childrens hospital.
15. Normally, the costs of a direct mailing that contains a
solicitation for funds will be classified entirely as a
fund-raising (supporting services) expense. However, under a
specific set of circumstances, these costs can be allocated between
supporting services and program services. This allocation is
allowed where the mailing has a specific call for action that would
have been made even without the fund raising solicitation. This
call for action must further the mission of the organization and
the appeal cannot be made purely to potential donors. For example,
if a mailing was made by a private not-for-profit blood service
asking all previous blood donors to donate blood during the next
six weeks and was accompanied by a request for funds, the direct
mail costs should probably be allocated between program service
costs and supporting service costs.
16. Unconditional promises to give must be recorded immediately
by a private not-for-profit organization at present value (if not
to be received within the next year) and net of an allowance for
uncollectibles. An unconditional promise requires no future service
or action by the charity.
17. An unconditional promise to give is recorded immediately by
the private not-for-profit organization that anticipates receiving
the gift. Conversely, an intention to give is not to be recorded.
In practice, the difference between the two can be rather subtle.
If donors have the ability or the right to change their minds, the
assumption is that they have only expressed their intention to make
a gift at some time in the future but have not yet made an
unconditional promise. If an action is required of the charity, the
promise is not unconditional.
18. A number of private not-for-profit organizations assess dues
of their membership and also receive contributions. Dues are only
considered revenues rather than contributions if the member
receives a benefit in return. That benefit can take the form of a
periodic newsletter or journal or can also be the use of the
facilities and services of the organization. However, if nothing of
value is really being given to the member, the dues are considered
to be merely donations. Here, revenues indicate some type of
exchange transaction.
19. A third-party payor is any outside party who assumes
responsibility for all or a part of a patient's medical charges.
The most commonly encountered third-party payors would include
insurance companies, Medicare, and the like. Because these third
parties bear such a significant portion of the medical costs in
this country, they require extensive as well as accurate financial
information. Health care organizations have long been required,
therefore, to develop and maintain accounting systems that will
provide this needed data.
20. A contractual adjustment refers to a portion of a patient's
charged fee that a health care organization estimates will not be
received because of agreements with third-party payors. These
arrangements specify that the provider (the health care entity) is
willing to accept an amount that is less than its normal charge if
the third-party payor determines that a lesser figure is reasonable
for the services rendered. As an example, if a hospital charges
$60,000 for a specific service but the third-party payor
responsible for payment remits only
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$51,000 (based on its determination of reasonable costs for this
service in this area of the world), the hospital must accept that
amount as payment in full. The $9,000 reduction is recorded by the
hospital as a contractual adjustment.
These reductions may take an extended period of time to
finalize. Thus, the amounts are estimated by the health care
organization and recorded (for matching purposes) at the time that
the original invoice is submitted.
Answers to Problems
1. C (Amounts charged to patients less contractual
adjustments)
2. A
3. B
4. B (Permanently restricted net assets have increased by only
$120,000.)
5. B (Since the donor continues to have control, an asset [a
receivable] will be reported. Because of the uncertainty, Charity
Two should report nothing until received.)
6. B (The financial aid is shown as a direct reduction to the
tuition revenue so that revenues and support should total only
$780,000.)
7. C (The work of the librarian does not enhance a nonfinancial
asset nor does it require a specialized skill that would be
purchased if not donated.)
8. D (If the other information that is included contains a call
for a specific action that will help accomplish the mission of the
charity and if the mailing is not directed solely to potential
donors, a portion of the costs can be allocated to program service
expenses.)
9. A (The FASB wanted to get away from fund accounting and
provide information about the private not-for-profit organization
as a whole.)
10.C (The money to be used for the building is temporarily
restricted for that purpose whereas the other $2 million is
permanently restricted so that only the income can be used.)
11.D (The charity must convey the donation to the designated
beneficiary. Unless the charity was given variance powers that
allowed it to change the beneficiary, this amount represents a
liability to the Jones family.)
12.B
13.B
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14.A (Because of the time restriction, the amount spent for
playground equipment remains in temporarily restricted net assets
until depreciated. The equipment was bought at the end of the year
so that no depreciation was recorded and no reclassification was
made.)
15.D
16.C
17.C
18.D (The charity care work should not be recorded in any way
because there is no expectation of collection. The contractual
adjustment is reported as a contra balance to the revenue.)
19.B
20.B
21.C
22.D (These services do not meet the criteria for donated
services that are recognized.)
23.B
24.A
25.B
26.A (The fund-raising costs and administrative salaries are
supporting service expenses.)
27.B
28.D
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29.(10 minutes) (Reporting of various account balances by a
not-for-profit health care organization)
Donated medicines = an asset is reported as well as an increase
in unrestricted net assets because of the contribution
Donated services (replacing salaried workers) = contribution
causes an increase in unrestricted net assets along with an
accompanying decrease in unrestricted net assets because the
expense is recognized
Donated services (not replacing salaried workers) = not
recordedInterest income = revenue is an increase in unrestricted
net assetsCharges to patients = increase in unrestricted net assets
shown as net patient
service revenuesCharity care = not recorded if the organization
has no intention of seeking
collectionBad debts = amount is anticipated and recorded as an
expense that decreases
unrestricted net assets
30. (15 Minutes) (Series of questions about the reporting of
health care entities)
a. A third-party payor is an organization such as Medicare or an
insurance company that pays a portion, or all, of a patient's
medical expenses. Because of their need for accurate financial
information, such third party payors have exerted pressure over the
decades on health care entities to develop adequate accounting
principles.
b. A contractual adjustment is a reduction to patient service
revenues created when a lesser amount is paid by a third-party
payor and accepted as payment in full by a health care entity.
These outside parties often have established contractual
arrangements whereby the health care entity agrees to accept a
lower amount for a service if the third party determines the figure
to be reasonable. These contractual adjustments create an
accounting problem for the health care organization since it is not
always able to determine the amount that eventually will be
collected. Consequently, the entity recognizes the full amount of
the invoice as a patient service revenue at the time the service is
performed. The health care entity then estimates and establishes an
offsetting Contractual Adjustment account to reduce the amount of
net reported revenue to the amount anticipated as being
collected.
c. At the time that materials are donated to a health care
entity (or any private not-for-profit organization), the fair value
is recorded as an asset. Because of the donation, a Contribution
Revenue is also recognized as an increase in unrestricted net
assets. If the asset has an extended life, the organization can
assume a time restriction on the use of the asset so that the
Contribution Revenue is reported initially as an increase in
temporarily resticted net assets. An amount is then reclassified to
unrestricted net assets each period equal to depreciation
expense.
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Donated services are recorded as a Contribution Revenue and as a
Salary Expense; both are shown as changes in unrestricted net
assets. The FASB requires private not-for-profit organizations to
recognize donated services but only if they enhance nonfinancial
assets or require specialized skills, are provided by individuals
possessing those skills, and would need to be purchased if not
provided by donation. If the donated service enhances a
nonfinancial asset, the Contribution Revenue recognized is balanced
with an increase in the assets reported balance rather than as
Salary Expense.
31.(5 Minutes) (Reporting of various accounts by a
not-for-profit organization)
Only $7.6 million is reported as patient service revenues.
Charity care of $1.4 million is not recorded because no attempt at
collection is anticipated. Then, the contractual adjustment total
of $800,000 is netted with the revenue to leave the hospital with a
net patient service revenue figure to report of $6.8 million.
The supplies are recorded at their $4,000 value with an
offsetting entry to Contribution Revenues, which is an increase in
unrestricted net assets.
All $860,000 of the board-designated assets remain as
unrestricted net assets because neither the cash nor the
investments has been restricted by an external donor. On the
statement of financial position, these assets can be classified as
"Assets Whose Use Is Limited" for disclosure purposes.
32. a). (8 Minutes) (Recording donations given to a voluntary
health and welfare organization)
Pledges
............................................................................
$600,000Anticipated Amount Deemed to be Uncollectible (15%) (90,000
)
Net Pledge
Balance.....................................................
$510,000
Increase in Unrestricted Net Assets in 2008Contributed Support
(60%)......................................... $306,000
Increase in Temporarily Restricted Net Assets in2008Contributed
Support (40%)............................. $204,000
b). Donated services would be valued at $5,400 and recognized as
an increase in Unrestricted Net Assets as contributed support. At
the same time, a salary expense is also recognized for this same
amount which serves as a decrease in Unrestricted Net Assets.
Therefore, no overall effect is created but the impact of the
donation is reflected.
33.(65 Minutes) (Preparation of both a statement of activities
and a statement of financial position for a private not-for-profit
organization)
a.Statement of Activities
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Unrestricted Net Assets
Temporarily Restricted Net Assets
Permanently Restricted Net Assets
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Public Supporta. Contributions $210,000 $78,000b.
Contribution
Interest 3,000
Revenuec. Membership dues 30,000d. Investment income 3,900
9,100
e.Net assets released from
restriction 72,000 (72,000)
Total Public Support and Revenue $315,900 $18,100
Expenses
Program service expensescure diseasef. Salaries (26,500)g.
Depreciation (16,000)h. Supplies (93,000)
Total (135,500)
Supporting service expenses General and administrativei.
Salaries (32,000)j. Depreciation (2,000)
Total (34,000)
Fund-raisingk. Salaries (26,500)l. Advertising (2,000)m.
Depreciation (2,000)
Total (30,500)
Total Expenses (200,000)
Change in Net Assets $115,900 $18,100 -0-
Net Assets at Beginning of Year 400,000 200,000 $100,000
Net Assets at End of Year $515,900 $218,100 $100,000
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33. (continued)
Explanation of Balancesa. Contributions. The balance to be
reported is the unrestricted gift plus present
value of unrestricted pledge. Pledge is viewed as temporarily
restricted because it will not be collected for three years.
b. Contribution-Interest. The pledge is recorded at its present
value. Interest that must be recognized to raise the balance to the
pledge amount is reported as contribution revenue.
c. Membership dues. The amount received is shown as a revenue
and not as public support because rights are being conveyed to the
members.
d. Investment income. Although this income is earned on
permanently restricted net assets, 70 percent is shown as
temporarily restricted because the donor has specified that it must
be spent on advertising, whereas the remaining 30 percent is
unrestricted.
e. Net assets released from restriction. Three restricted
amounts were properly spent during the period: $20,000 for
salaries, $50,000 for equipment, and $2,000 for advertising. No
implied time restriction was assumed for the equipment so the
reclassification was made immediately.
f. Salaries. During the period, $24,000 was paid in salaries and
another $2,500 was owed at the end of the year.
g. Depreciation. Of the total for the period, 80 percent was
allocated to program service expenses because that amount of the
equipment was used for that purpose.
h. Supplies. A total of $93,000 was acquired and used during the
year.i. Salaries. Administrative salaries amounted to $32,000 for
the year.j. Depreciation. Of the total for the period, 10 percent
was allocated to general
and administrative expenses.k. Salaries. During the period,
$24,000 was paid in salaries and another $2,500
was owed at the end of the year.l. Advertising. Only $2,000 in
advertising costs were incurred during the period.m. Depreciation.
Of the total for the period, 10 percent was allocated to fund-
raising expenses.
---Because it qualifies as a museum piece, recording of the
painting is optional. Officials do not want to report the painting,
and they are not required to report it. ----The $10,000 gift must
be conveyed to an outside beneficiary and is reported by the
not-for-profit organization as a liability.
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33. (continued)b.
Statement of Financial PositionAssetsa. Cash $738,000b. Pledge
Receivable 81,000c. Equipment $300,000d. Accumulated Depreciation
(20,000 ) 280,000
Total Assets $1,099,000
Liabilitiese. Salaries Payable $5,000f. Notes Payable 250,000g.
Donated Amount That Is Due to
Separate Organization 10,000 $265,000
Net Assets (see Statement of Activities)Unrestricted
$515,900Temporarily Restricted 218,100Permanently Restricted
100,000 834,000
Explanation of Balances:
a. Cash. The final balance is the beginning cash figure of
$700,000 plus $210,000 in contributions, less $80,000 for salaries,
less $50,000 for equipment, plus $30,000 in membership dues, plus
$10,000 contribution that must be conveyed to separate
organization, plus $13,000 investment income, less $2,000 paid for
advertising, and less $93,000 paid for supplies.
b. Pledges receivable. The amount to be reported is the present
value as of the end of the year (including the interest accrued for
the period).
c. Equipment. Organization acquired $300,000 of equipment during
the year.d. Accumulated Depreciation. The amount recorded for this
initial year of
ownership.e. Salaries Payable. The amount owed employees as of
the end of the year.f. Notes Payable. The liability incurred in
acquiring equipment.g. Donated Amount That Is Due to Separate
Organization. Amount given by a
donor that must be conveyed to a separate organization. The
amount must be shown as a liability since no mention was made that
the organization had variance powers that would allow it to change
the beneficiary.
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34.(50 Minutes) (Effect of various transactions on unrestricted
and restricted net assets)
a. InvestmentsInternally Restricted
................................
160,000Cash........................................................................
160,000
b.
Cash...................................................................................
80,000Contributed Support Permanently Restricted Net Assets
................. 80,000
c. Inventory of
Medicines.....................................................
25,000Cash........................................................................
25,000
ReclassificationTemporarilyRestricted Net
Assets................................................. 25,000
ReclassificationUnrestrictedNet
Assets.........................................................
25,000
d. Accounts
ReceivablePatients......................................
120,000Accounts ReceivableThird-Party
Payors...........................................................................
480,000Patient Service
Revenues..................................... 600,000
e. Depreciation
Expense......................................................
38,000Accumulated Depreciation...................................
38,000
f.
Cash...................................................................................
15,000Interest Revenue
Unrestricted Net Assets (internally restricted) 15,000
g. Bad Debt
Expense............................................................
20,000Allowance for Uncollectible
Accounts...........................................................
20,000
Contractual
Adjustment...................................................
30,000Allowance for Reduced Charges.........................
30,000
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34. (continued)
h. Supplies Expense
............................................................
25,000Inventory of
Medicines.......................................... 25,000
i. Cash
..................................................................................
172,000InvestmentsInternally Restricted......................
160,000Gain on Sale of InvestmentsUnrestricted
Net
Assets.........................................................
12,000
Equipment.........................................................................
212,000Cash ($172,000 + $15,000 + $25,000)...................
212,000
ReclassificationTemporarilyRestricted Net
Assets................................................. 25,000
ReclassificationUnrestrictedNet
Assets.........................................................
25,000
j.
Cash...................................................................................
12,600Pledges Receivable (present
value)............................... 98,000
Allowance for Uncollectible Pledges...................
9,000Contributed SupportUnrestricted
Net
Assets.........................................................
12,600Contributed SupportTemporarily
Restricted Net Assets......................................
89,000
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34. (continued)Calculation of Changes in Net Assets
Unrestricted Temporarily Restricted Permanently RestrictedNet
Assets Net Assets Net Assets
a. No change
b. DonationIncome forSalaries 80,000
c. StipulationMetReclass-ification 25,000 (25,000)
d. PatientServices 600,000
e. Depreciation (38,000)
f. Interest 15,000
g. Bad Debts (20,000)
ContractualAdjustment (30,000)
h. SuppliesExpense (25,000)
i. Gain onInvestments 12,000
StipulationMetReclas-sification 25,000 (25,000)
j. Pledges 12,600 89,000
Increase (Decrease)In Net Assets 576,600 39,000 80,000
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35. (45 minutes) (Produce journal entries for a private
university as well as a statement of activities)
a. Tuition Receivable 1,200,000Tuition Revenues 1,200,000
b. Investments 300,000ContributionsPermanently
Restricted 300,000
c. Cash 700,000ContributionsTemporarily
Restricted 700,000
d. ScholarshipsFinancial Aid 100,000Tuition Receivable
100,000
e. Salary Expenses 310,000Cash 310,000
f. Salary Expense 80,000Contributed Service Revenues
Unrestricted Net Assets 80,000
g. Equipment 200,000 Cash 200,000
Temporarily Restricted AssetsReclassification 200,000
Unrestricted Net Assets Reclassification 200,000
h. Investments 30,000Unrealized Gain on Investments
Permanently Restricted Assets 30,000
i. Cash 9,000Dividend RevenueUnrestricted
Net Assets 9,000
j. Depreciation Expense 32,000Accumulated Depreciation
32,000
k. CashInternally Restricted 100,000Cash 100,000
35. (continued)
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l. Pledge Receivable 7,000ContributionTemporarily
Restricted Assets 7,000
m. No entry because of choice made by officials
n. Utilities and Other Expenses 212,000Cash 212,000
o. No entrydoes not require a specialized skill.
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35. (continued)
University of DanvilleStatement of Activities
Unrestricted Temporarily Permanently TotalNet Restricted
Restricted
Assets Net Assets Net Assets Revenues and Gains-Tuition
1,200,000-Scholarships (100,000) 1,100,000 1,100,000
-Unrealized Gain on Investments 30,000 30,000-Dividend Revenue
9,000 9,000
Contributions-Cash and Other Assets 707,000 300,000
1,007,000-Services 80,000 _______ __80,000
Total Revenues, Gains, And Contributions 1,189,000 707,000
330,000 2,226,000
Net Assets Released From Restriction 200,000 (200,000 ) _______
________
Totals 1,389,000 507,000 330,000 2,226,000
Operating Expenses-Salaries 390,000 390,000-Depreciation 32,000
32,000-Utilities and Other Expenses 212,000 212,000
Total Expenses 634,000 634,000
Increase in Net Assets 755,000 507,000 330,000 1,592,000
Net AssetsBeginning Of Year 400,000 200,000 100,000 700,000
Net AssetsEnd of Year 1,155,000 707,000 430,000 2,292,000
36.(30 Minutes) (Series of questions about private
not-for-profit organizations)
a. Many private non-for-profit organizations depend heavily on
gifts and grants from outside parties. An earning process is not
present in connection with such receipts; asset inflows are simply
created by donations. Such amounts are reported as public or
contributed support. These same organizations, however, do
sometimes earn (in an accounting sense) some of the funds that are
received. Membership dues, for example, are not viewed as gifts if
rights
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that have value are conveyed to the members. The organization
may also have receipts from sources such as interest or dividend
income. Money derived in this fashion is not the same as a donation
and is, thus, recorded as a revenue.
b. The statement of functional expenses is required to be
reported by voluntary health or welfare organizations and is
permitted for all other private not-for-profit organizations. It
allows the reader to determine the ultimate usage of the money that
has been raised by the organization. Expenses are separated
according to program service expenses (directed towards activities
of the organization that relate to its goals and mission) and
supporting service expenses (dealing with the cost of running the
organization and raising funds). This statement permits interested
parties such as potential donors to see the allocation that has
been made of the organizations resources.
c. Some charitable organizations (Goodwill Industries and the
Salvation Army, for example) receive a large portion of their
contributions in the form of donated materials such as clothing and
furniture. If the value of these goods has a clearly measurable
basis, recording the gifts as contributed support is
appropriate.
d. A not-for-profit organization may receive gifts (or
unconditional promises to give) from outside parties that (1) must
be expended for a particular purpose or (2) cannot be expended
until a particular point in the future. Because the organization
does not have the free use of these assets, they are labeled as
"Temporarily Restricted Assets." At the time that the stipulation
is met or the time period arrives, the asset is reclassified into
the Unrestricted Net Asset category.
Other gifts may be given where the donor specifies that only the
subsequent income can be expended (frequently for a designated
purpose). Because the assets received in the original gift cannot
be expended, they are termed Permanently Restricted Assets."
e. Donated services are extremely common in the operation of
many not-for-profit organizations. Literally thousands of
individuals solicit funds for organizations such as the Heart Fund,
Salvation Army, and March of Dimes. In addition, individuals often
voluntarily fill positions of responsibility throughout many of
these organizations. Donated services are formally recognized in
the accounting records but only if specific circumstances are
met:
1. The service creates or enhances a nonfinancial asset or
2. The service requires a specialized skill possessed by the
donor that the organization would have had to be purchased if not
donated.
f. Prior to 1987, the costs of direct mailings and other
solicitations for support were recorded by private not-for-profit
organizations as fund raising expenses
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even if educational materials were included. In that year, this
requirement was modified so that an allocation of the joint costs
could be made between educational expenses (a program service cost)
and fund raising (a supporting service cost). These organizations
took advantage of this rule because it made their statements look
like they were spending more to meet their goals. In 1998, the
AICPA issued its Statement of Position 98-2 Accounting for Costs of
Activities of Not-for-Profit Organizations and State and Local
Governmental Entities That Include Fund-Raising. This SOP stated
that direct mailing costs should be assigned entirely to
fund-raising costs unless a specific call for action was being made
that was not limited to potential donors. This call for action had
to be one that would further the mission of the organization. If
these requirements were met, a portion of the direct mailing costs
could be assigned to program service expenses.
g. Donated materials are normally reported as assets at their
fair market value accompanied by an increase in unrestricted net
assets. However, the recording of art works, historical treasures,
and museum pieces is optional. An item qualifies for such treatment
if (1) it is part of a collection for public exhibition, education,
or research, (2) it is protected and preserved, and (3) if sold,
the money received must be used to acquire other collection
items.
37. (25 Minutes) (Determine impact of various transactions on a
private college.)
(1)---False. The January 1, Year One restriction is internal
and, therefore, causes no changes in the amount of unrestricted net
assets. Such changes can only be created by external donors.
(2)---True. The stipulation of the April 1, gift is that only
subsequent cash income can be used for the designated purpose.
Therefore, changes in value are shown as adjustments to the
permanently restricted net assets.
(3)---True. As indicated in (2), the donor has indicated that
only cash income can be used for the football stadium. The change
in value increases the amount of the assets held in permanently
restricted net assets.
(4)---True. The school has properly spent the $500,000 earned on
the investments. The school has not set a policy that assumes a
time restriction on the use of this stadium. Therefore, the
reclassification to unrestricted net assets is made immediately at
the time of proper expenditure.
(5)---False. Depreciation expense is appropriate for all
long-lived assets with a finite life regardless of the policy of
the school.
(6)---False. This is the same answer as in (5). Depreciation
expense is appropriate for all long-lived assets with a finite life
regardless of the policy of the school.
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(7)---True. The acquisition of the football stadium seat has two
effects. Because the value of that seat for watching football games
is $12,000, the school should recognize that amount as revenue. Dr.
Johnson paid an extra $18,000, apparently as a gift to the school.
There is no mention of a donor restriction on this additional
amount so it is a contribution that also increases unrestricted net
assets.
(8)---True. This is the same answer as in (7). Dr. Johnson paid
an extra $18,000, apparently as a gift to the school. There is no
mention of a donor restriction on this additional amount so it is a
contribution that also increases unrestricted net assets.
(9)---True. These donated services meet the requirement for
being reported so that a contributed revenue as well as a salary
expense must be recognized.
(10)---False. Based on the information given, both the revenue
and the expense must be reported. Might implies an option which is
not available for this type of donation.
(11)---False. The answer is the same as in (10). Both the
revenue and the expense must be reported. Unrestricted net assets
both go up and go down.
(12)---False. If this painting does not qualify as a work of
art, the school must record the asset at $30,000 along with a
contribution revenue of that same amount. If the painting does
qualify as a work of art, the school can either make the above
entry or simply make no entry. Therefore, under one set of
circumstances, the contribution revenue is not required.
(13)---False. As in answer (12), the handling depends on whether
this painting qualifies as a work of art. However, if the value is
$30,000, there is no situation where the school is not allowed to
recognize a revenue.
38. (30 Minutes) (Determine changes in net asset balances for
several different types of transactions)
Part (1)--Unrestricted Net Assets No net change. When the
$22,000 is spent properly, a reclassification of that amount is
made into Unrestricted Net Assets. At the same time, though, a
faculty salary expense of the same amount is recognized. The two
balance out for no net impact.--Temporarily Restricted Net Assets
Increase by $9,000. The $31,000 of investment income increases this
category but it is then reduced by the $22,000 reclassified into
Unrestricted Net Assets because it is properly spent. --Permanently
Restricted Net Assets Increase by $400,000. The current donation
increases this category because only the subsequent income can be
spent.
Part (2)
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--Unrestricted Net Assets No net change. Because of the
restriction on the use of the machine for this period of time, the
$200,000 gift is initially reported as an increase in Temporarily
Restricted Net Assets. At the end of the year, the asset balance
will be reduced by $20,000 in depreciation. Thus, a $20,000
reclassification moves a $20,000 balance from Temporarily
Restricted Net Assets to Unrestricted Net Assets. That $20,000
increase will exactly offset the $20,000 in depreciation expense
also recognized within Unrestricted Net Assets.--Temporarily
Restricted Net Assets Increase by $180,000. Because of the
restriction on the time use of the asset, the $200,000 is initially
recorded here in Temporarily Restricted Net Assets. The $20,000
reclassification discussed above reduces that net increase to
$180,000.--Operating Expenses Increases by the $20,000 in
depreciation expense.
Part (3)--Unrestricted Net Assets Increase by $1.6 million. The
tuition revenue of $2 milion is reduced by the $700,000 in
financial aid for a net increase of $1.3 million. However, because
$300,000 of previously restricted net assets were used here, a
reclassification of that amount from Temporarily Restricted Net
Assets to Unrestricted Net Assets causes the overall increase to be
$1.6 million.--Operating Expenses There are no operating expenses.
Financial aid is a reduction to tuition revenue and not an
operating expense.--Temporarily Restricted Net Assets Decreases by
$300,000. Money that had previously been restricted was properly
utilized. Thus, a reclassification of this amount is reported.
39. (45 Minutes) (Prepare financial statements for a
not-for-profit organization.)
a. Entries for this not-for-profit organization are presented
below. The numbers in parenthesis indicate account totals at that
point in time during the period. This method is used as an easy way
to gather account balances.
Pledges receivable...................................... 20,000
(220,000)Contribution revenueinterest--unrestricted
net assets........................................... 20,000 (
20,000)
Cash
............................................................
100,000 (200,000)Allowance for uncollectible pledges........ 4,000
Pledges receivable................................. 104,000 (net of
120,000)
Cash
............................................................
180,000 (380,000) Contributions revenueunrestricted net
assets............................................. 180,000
(180,000)
Salary expense............................................
90,000 ( 90,000) Cash
...................................................... 90,000
(290,000)
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Reclassification - Temporarily restricted net
assets.................................................. 15,000 (
15,000) Reclassification - Unrestricted net
assets..................................................... 15,000
( 15,000)
Cash
............................................................ 12,000
(302,000) Contributions revenuetemporarily restricted 12,000 (
12,000)(To record gift to go to a specified beneficiary.
Organization reportsa revenue because it has variance powers.)
Land, buildings, and equipment .............. 500,000 (700,000)
Note payable............................................ 450,000
(450,000) Cash
...................................................... 50,000
(252,000)
Reclassification - Temporarily restricted net
assets.................................................. 50,000 (
65,000) Reclassification - Unrestricted net
assets..................................................... 50,000
( 65,000)(To record reclassification of restricted amount properly
spent.)
Cash
.............................................................
30,000 (282,000) Membership revenueunrestricted net assets 30,000 (
30,000)(Membership dues are listed as revenues and not
contributions because members receive substantial benefits.)
Cash..............................................................
30,000 (312,000) Investment revenueunrestricted net assets 30,000 (
30,000)(Income is earned on permanently restricted net assets but
use of the income is unrestricted.)
Rent expense...............................................
12,000 ( 12,000)Advertising expense
.................................. 15,000 ( 15,000)Utilities
expense ......................................... 16,000 ( 16,000)
Cash ...................................................... 43,000
(269,000)
Pledges receivable...................................... 149,000
(269,000) Contributions revenuetemporarily restricted net assets
........................................... 149,000
(161,000)(Although pledge is unrestricted, it will not be collected
for fiveyears and, therefore, the proceeds are viewed as
temporarily restricted.)
Pledges receivable...................................... 6,000
(275,000) Contribution revenueinterest--temporarily restricted net
assets ......................... 6,000 ( 6,000)
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Depreciation expense ................................ 40,000 (
40,000) Land, buildings, and equipment ......... 40,000
(660,000)
Interest expense..........................................
15,000 ( 15,000) Cash
...................................................... 15,000
(254,000)
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39. (continued)
Based on the final balances computed above, the following
statements can be prepared.
WATSON ORGANIZATIONSTATEMENT OF ACTIVITIES
For Year Ending December 31, 2008
Temporarily Permanently Unrestricted Restricted Restricted Net
Assets Net Assets Net AssetsContributions revenue $ 180,000 $
161,000Contributions -- interest revenue 20,000 6,000Investment
revenue 30,000Membership revenue 30,000 _______ ________ Total
revenues $ 260,000 $ 167,000
Net assets released from restriction 65,000 ( 65,000)
________
Total revenues and net assets released from restriction $
325,000 $ 102,000 ________
Expenses:General and administrativeRent $ (12,000)Salary
(90,000)Advertising (15,000)Utilities (16,000)Depreciation
(40,000)Interest (15,000)
Total expenses $(188,000)
Excess of total revenues and net assets released from
restriction over expenses $137,000 $102,000 -0-
Net assets at beginning of year 400,000 100,000 $300,000
Net assets at end of year $537,000 $202,000 $300,000
39. (continued)
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b.WATSON ORGANIZATION
STATEMENT OF FINANCIAL POSITIONDecember 31, 2008
ASSETSCash $ 254,000Pledges receivable (net) 275,000Investments
300,000Land, buildings, and equipment (net) 660,000 Total assets
1,489,000
LIABILITIES Notes payable 450,000
NET ASSETS- Unrestricted $537,000- Temporarily restricted
202,000- Permanently restricted 300,000 $1,039,000
40. (15 minutes) (Adjusting totals for an incorrectly reported
balance)
a. The tuition was properly recorded as a revenue. However, the
financial aid figure should have been a direct reduction to the
tuition revenue rather than an expense. In either case, the aid
reduces unrestricted net assets so the $400,000 total computed at
the end of the year is correct.
b. As indicated in (a), the financial aid should not have been
an expense but, rather, a reduction in the tuition revenue.
Removing the $140,000 from the recognized expenses reduces that
total from $500,000 to $360,000.
41. (15 minutes) (Adjusting totals for incorrectly recorded
expenditures)
a. Because the use of the interest was specified by the donor,
both interest balances should have been recorded initially within
the Temporarily Restricted Net Assets. When properly spent, these
amounts would have been reclassified into Unrestricted Net Assets.
The organization recorded the amounts immediately in Unrestricted
Net Assets. Since the amounts have been properly spent, they did
wind up in the category where they were supposed to be reported.
The $400,000 shown as unrestricted net assets is correct.
b. Each amount was reported as expenses in unrestricted net
assets and that handling was correct. No change is needed so that
the $500,000 reported as expenses is shown properly.
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c. As indicated in (a), the $5,000 and the $7,000 should have
gone to Temporarily Restricted Net Assets and then been removed
through a reclassification. No net effect is left. Because nothing
was recorded by the organization in Temporarily Restricted Net
Assets, the total of $300,000 is correct.
42. (20 minutes) (Adjusting the incorrect recording of a
donation and subsequent expenditure)
a. Because a time restriction has been assumed, only $5,000
($50,000/10 years) should have been reclassified from Temporarily
Restricted Net Assets into Unrestricted Net Assets. However, the
organization increased Unrestricted Net Assets by $50,000. The
final balance being reported, therefore, is $45,000 too high.
Removing this $45,000 inflation reduces the final Unrestricted Net
Asset figure from $400,000 down to $355,000.
b. Depreciation expense of $5,000 ($50,000/10 years) was
recorded within the Unrestricted Net Assets. That handling is
appropriate so that the $500,000 expense figure that is reported is
correct.
c. Since the problem says that the correct entry was made in
Year One, there is a $50,000 balance in Temporarily Restricted Net
Assets. Because a time restriction was assumed, only an amount
($5,000) equal to the depreciation recorded should have been
reclassified to Unrestricted Net Assets. That $5,000 amount was
never removed. Reclassifying the $5,000 reduces Temporarily
Restricted Net Assets from $300,000 to $295,000. The $50,000
reclassification error does not affect this category.
43. (5 minutes) (Incorrect reporting of membership dues)
In this case, since nothing was received in exchange for the
members dues, these dues should have been recorded as a $100,000
per year contribution which would increase Unrestricted Net Assets.
The dues were recorded as a membership revenue which is incorrect
but it does increase Unrestricted Net Assets. So, the source is
wrongly reported but the total Unrestricted Net Assets is correctly
stated at $400,000.
44. (15 minutes) (Reporting of donated services)
a. The problem here is that an expense of $70,000 was reported
when the donation was a garage that should have been capitalized as
an asset. Subsequently, though, this asset would have been
depreciated at the rate of $7,000 per year. For this reason, the
expenses are overstated by $63,000 which causes Unrestricted Net
Assets to be understated by
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$63,000. Instead of an Unrestricted Net Assets balance of
$400,000, the organization should have reported $463,000.
b. The organization reported no assets. The organization should
have reported a $70,000 garage less $7,000 in accumulated
depreciation. The net balance of $63,000 should be added to the
reported total for assets of $900,000 to arrive at a corrected
figure of $963,000.
c. As indicated in (a) above, the expenses were overstated by
$63,000. Removing this $63,000 drops the expense total from
$500,000 to $437,000.
45. (10 minutes) (Reporting a gift that must be transferred to
another party)
a. This money is still under the control of the donor.
Consequently, the organization should have recorded a liability to
the donor until a final resolution. Instead, the charity recorded a
contribution revenue which served to increase Unrestricted Net
Assets. That $40,000 should be removed so that Unrestricted Net
Assets are $360,000 and not $400,000.
b. This issue is about whether a contribution or a liability
should be reported. The amount reported as assets is not in
question and is, then, correctly stated at $900,000.
Develop Your Skills
Research Case 1
This is an excellent assignment to demonstrate the wealth of
information that is available on the Internet about charities. Many
individuals want to be generous and help organizations that deserve
their assistance. Determining, though, whether an organization is
truly worthy of support is not necessarily easy. Every organization
will claim that it is effectively helping to improve some element
of society that is in need.
Obviously, the information that a student finds at this website
will depend upon the specific organizations that are examined.
However, some of the information that is normally available
includes:
stated purpose of the organization, year it was started, the
existence of any affiliated organizations, whether this
organization has met all of the standards of the group that
created the website and, if not, what was the problem, a
discussion of the organizations programs along with the program
expenses, identification of the chief executive officer (along
with compensation),
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number of individuals on the board and the number of staff
members working in the organization,
methods used for fund-raising, tax status, sources of funding,
including dollar amounts
From this type of information, a student should be able to write
a good overview of the organization and its operations and
finances.
RESEARCH CASE 2
This case is designed to introduce students to the information
that can be found on the Form 990 that must be made public by
tax-exempt organizations. Much of the information is the same as is
shown on the organizations financial statements but the
availability of the Form 990 ensures that such information is made
public.
Most not-for-profit organizations that a student might research
will qualify as Section 501(c)(3) charities.
The salary information will give an opportunity to discuss
whether officials of these organizations made too much or too
little. Do the amounts seem reasonable in comparison to the amount
of revenues generated or the amount of assets held. What, for
example, would the president of a comparable for-profit business
make in salary and other compensation?
One exercise that can be done is to simply list on the classroom
board the types of information that the students uncover. Which of
these is most important and why is each of the items listed
included?
Analysis Case 1
Many times a potential donor may be interested in an array of
information that can only be found by studying the actual financial
statements of a not-for-profit organization. The purpose of
financial statements is to provide a complete picture of the
financial operations and position of the organization to help
outsiders make decisions. Students can observe the construction of
financial statements in textbooks but only by actually making use
of these statements can they come to appreciate the information
that is available. One way to approach this assignment is to ask
the students to list out the five most interesting pieces of
information that they uncover about a particular charity.
The web site for many not-for-profit organizations can be found
by going to www.give.org and then clicking on Charity Reports. At
that spot, a large number of charitable organizations are listed.
By clicking on a specific charity, the student can get considerable
information including the organizations website address.
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The exact information that is found will, obviously, depend on
the particular not-for-profit organization that is studied. As just
one example, the following information comes from recent financial
statements for the American Heart Association for the year ended
June 30, 2006:
1--This not-for-profit organization has four different program
services listed in its financial statements: research, public
health education, professional education and training, and
community services.
2--The charity reported total expenses for 2006 in excess of
$681 million. Of that total, more than $137 million was incurred in
connection with supporting services. Thus, approximately 20 percent
of each dollar of expense was incurred in connection with
supporting services.
3--In the statement of activities, the American Heart
Association recognized $87.5 million in donated services for the
year ended June 30, 2006. Note 1, section j, spells out additional
information about these donations as well as other donated services
that were not recognized.
4--A question that is raised in connection with virtually any
charitable organization has to do with the amount of resources that
are expended to raise more resources. In the year ended June 30,
2006, the American Heart Association, incurred $88.5 million in
fund-raising expenses. That amount makes up approximately 13
percent of the organizations total expenses for the period.
5--The financial statements at June 30, 2006 show that the
American Heart Association held $319.7 million in unrestricted net
assets, $244.4 million in temporarily restricted net assets, and
$147.6 million in permanently restricted net assets.
6--During FYE June 30, 2006, $111.5 million of temporarily
restricted net assets were reclassified as unrestricted. Either the
related purpose restriction or the time restriction had been
satisfied.
Analysis Case 2
Most private colleges and universities now place their latest
audited financial statements on their Web site. However, in some
cases, a bit of searching is needed to locate these statements. The
method by which the statements are made available is certainly not
standardized.
The information that will be uncovered by reading through these
financial statements will depend entirely on the school being used.
Here are the answers to the posed questions for the University of
Richmond as of June 30, 2006, and the year then ended:
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1--Tuition and fee revenue for the period totaled $109.2 while
the schools scholarship allowance was $34.7 million. Hence, this
financial aid covered approximately 31.8 percent of the tuition
charged to students. To put this information another way, the
average student paid 68.2 percent of the schools tuition
charges.
2--The Universitys balance sheet shows a pledge receivable of
over $20.9 million on its balance sheet. A look at note five to the
financial statements indicates that over 80 percent of that money
is expected within the next five years. Because a lot of these
dollars will not be received until well into the future, the actual
amount being reported is the present value of these expected future
cash flows discounted at rates ranging from 3 percent to 11
percent.
3--This is an extremely difficult question for any school to
answer because the costs of educating the students can be included
within several different accounts: instruction, libraries, academic
support, institutional support, and the like. So, no exact
comparison between educational costs and research costs is possible
here. However, considerable information can be determined about the
schools priorities simply by comparing instruction expenses ($52.0
million) and research expenses ($4.1 million).
4--For 2006, the University of Richmond shows $6.2 million in
operating revenue contributions and $8.0 million in non-operating
contributions (such as for buildings and equipment).
5--At the end of 2006, the University of Richmond reported $1.29
billion in unrestricted net assets, $42.5 million in temporarily
restricted net assets, and $279.1 million in permanently restricted
net assets. For these last two figures, the restrictions had to
have been put in place by an outside party (probably the
donor).
6--The statement of activities shows a total of both realized
and unrealized gains for the year of $168.4 million. No explicit
indication is made as to what part of that loss resulted from the
sale of investments and what part came from changes in fair market
value.
7--The problem with this computation is determining exactly what
is meant by education expenses. One way to compute that figure for
the University of Richmond for 2006 is as follows:
Net Tuition and Fees $74,488,125
Education Expenses (one way that term can be defined)Instruction
$51,956,444Libraries 10,286,082Academic Support 18,278,762Student
Services 11,687,030
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Institutional Support 30,629,603 (122,837,921 )
Net Loss on Educating Students $(48,349,796 )
Many students feel that, because of the high amounts being
charged, colleges and universities should make a great profit from
tuition. Depending on how education costs are defined, most schools
will show a monetary loss (and often a considerable loss) from the
process of educating students. This is one computation that can
really interest a college student.
Communication Case
There is a considerable amount of information available at this
Web site so that a students actual report will vary depending on
which pieces are emphasized. A general checklist is available:
(1) - Develop a Culture of Accountability and Transparency (2) -
Adopt a Statement of Values and Code of Ethics (3) - Adopt a
Conflict of Interest Policy (4) - Ensure that the Board of
Directors Understands and Can Fulfill Its Financial
Responsibilities (5) - Conduct Independent Financial Reviews,
Particularly Audits (6) - Ensure the Accuracy of and Make Public
Your Organizations Form 990 (7) - Be Transparent (8) - Establish
and Support a Policy on Reporting Suspected Misconduct or
Malfeasance (Whistleblower Protection Policy) (9) - Remain Current
with the Law
Each of these is then linked to considerably more information.
For example, at Be Transparent, the following advice is
available:
Information that should be made available on your organizations
website.
--Vision and mission statements; --Statement of values and code
of ethics; --Conflict of interest policy; --Form 990 or 990-PF,
with all parts and schedules (except contributors list with
amounts, which is protected under the Privacy Act); --Most recent
audited financial statements; --Information on programs and impact
of your work; --Information on evaluation procedures for assessing
effectiveness and performance of the organization; --Annual Report
or other regular report on accomplishments; --Information on
accreditations the organization holds or certifications/standards
it may meet; --List of board members and officers, and staff (if
you have security concerns you may refer inquiries to your
switchboard or to a general information email);
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--List of contributors (amounts of contributions should be
disclosed only with permission of contributor); donor requests for
anonymity should be honored; --Form 1023 (the organizations
original application for recognition of tax-exempt status);
--Bylaws or charter documents; and --Other relevant policies and
documents.
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