F8 - EPS, Cash Flows, and NFP Accounting

Chape Co. had the following information related to common and preferred shares during the year: Common shares outstanding, 1/1 700,000 Common shares repurchased, 3/31 20,000 Conversion of preferred shares, 6/30 40,000 Common shares repurchased, 12/1 36,000 Chape reported net income of $2,000,000 at December 31. What amount of shares should Chape use as the denominator in the computation of basic earnings per share? A. 684,000 B. 700,000 C. 702,000 D. 740,000

*C. 702,000* Explanation Choice "C" is correct. When computing the weighted average number of common shares outstanding (WACSO), shares issues, repurchased or converted must be time-weighted for the number of months outstanding: -The 20,000 common shares *repurchased (treasury stock)* on 3/31 have a time-weight of 9 months. -The *conversion of 40,000 preferred shares* on 6/30 have a time-weight of 6 months. -The 36,000 common shares repurchased (treasury stock) on 12/1 have a time-weight of 1 month. 1/1 700,000 x 12/12 = 700,000 3/31 20,000 x 9/12 = (15,000) 6/30 40,000 x 6/12 = 20,000 12/1 36,000 x 1/12 = (3,000) WACSO = 700,000 - 15,000 + 20,000 - 3,000 = 702,000 shares

During the year, Granite Co. sold a building for $100,000 resulting in a gain of $20,000. The building has a net book value of $80,000 at the time of the sale. Granite uses the indirect method when preparing its statement of cash flows. What is the amount that would be included in Granite's financing activities section because of the building sale? A. $0 B. $20,000 C. $80,000 D. $100,000

*A. $0* Explanation Choice "A" is correct. Financing activities cover transactions involving long-term liabilities and equity. The sale of a building (a long-term asset) would result in recording $100,000 as a cash inflow from investing. Choice "B" is incorrect. Although $20,000 is the gain from the sale, it would not be recorded in cash flow from financing activities. Choice "C" is incorrect. $80,000 is simply the carrying value of the building; it does not represent the cash impact of the sale. Choice "D" is incorrect. Although the cash inflow is $100,000, it is appropriately recorded as a cash inflow from investing.

In preparing its cash flow statement for the year ended December 31, Reve Co. collected the following data: Gain on sale of equipment Proceeds from sale of equipment 10,000 Purchase of A.S., Inc. bonds (par value $200,000) (180,000) Amortization of bond discount 2,000 Dividends declared (45,000) Dividends paid (38,000) Proceeds from sale of Treasury stock (carrying amount $65,000) 75,000 In its December 31, statement of cash flows, what amount should Reve report as net cash used in investing activities? A. $170,000 B. $176,000 C. $188,000 D. $194,000

*A. $170,000* Explanation Choice "A" is correct. Investing activities include acquisitions and sales of long-term assets or investment assets. Cash used equals $170,000 ($180,000 paid less $10,000 received from the sale of the equipment)

Hospital Inc., a not-for-profit organization with no governmental affiliation, reported the following in its accounts for the current year ended December 31: Gross patient service revenue from all services provided at the established billing rates of the hospital (note that this figure includes charity care of $25,000) $775,000 Provision for bad debts 15,000 Difference between established billing rates and fees negotiated with third-party payors (contractual adjustments) 70,000 What amount would the hospital report as net patient service revenue in its statement of activities for the current year ended December 31? A. $680,000 B. $690,000 C. $705,000 D. $735,000

*A. $680,000* Explanation Choice "A" is correct. Hospital Inc. would report net patient revenue in an amount equal to its gross patient service revenue net of both charity care and the difference between established billing rates and fees negotiated with third-party payors (sometimes called contractual adjustments). Net patient revenue for Hospital Inc. for the current year ended December 31 is computed as follows: *Gross patient revenues including charity care of $25,000* $775,000 *Less: Charity care* (25,000) *Less: Contractual adjustments (70,000) *Net patient service revenue* $680,000 Choice "B" is incorrect. The amount represented by this selection ($690,000) is the amount properly recognized as net patient service revenue ($680,000) plus charity care of $25,000 and net of bad debt expense of $15,000 given in the fact pattern. Charity care is improperly included and should not be recognized and bad debt expense is recognized as an expense, not a contra-revenue. Choice "C" is incorrect. The amount represented by this selection ($705,000) is the amount properly recognized as net patient service revenue ($680,000) plus charity care of $25,000. Charity care is improperly included and should not be recognized. Choice "D" is incorrect. The amount represented by this selection ($735,000) is the amount properly recognized as net patient service revenue ($680,000) plus contractual adjustments of $70,000 and net of bad debt expense of $15,000 given in the fact pattern. Contractual adjustments are improperly included and should not be recognized and bad debt expense is recognized as an expense, not a contra-revenue.

Guidance included in FASB ASC 958, Financial Statements of Not-for-Profit Organizations, focuses on: A. Basic information for the organization as a whole. B. Standardization of funds nomenclature. C. Inherent differences of not-for-profit organizations that impact reporting presentations. D. Distinctions between current fund and non-current fund presentations.

*A. Basic information for the organization as a whole* Explanation Choice "A" is correct. Not-for-profit reporting guidance included in FASB ASC 958 primarily focuses on basic information for the organization as a whole. The standards establish guidance for general-purpose external financial statements provided by a not-for-profit organization. Choice "B" is incorrect. Not-for-profit financial statements do not report funds in external financial statements. Choice "C" is incorrect. The focus of not-for-profit financial statements is on the basic information for the organization as a whole. Choice "D" is incorrect. Externally published not-for-profit financial statements do not report funds but, instead, focus on the basic information for the organization as a whole.

What is the appropriate characterization of the net assets of a nongovernmental not-for-profit organization? A. Residual interest. B. Ownership interest. C. Donor's interest. D. Equity interest.

*A. Residual interest.* Explanation Choice "A" is correct. Net assets of a nongovernmental not-for-profit organization are most appropriately characterized as the residual interest of the not-for-profit entity. The ownership interests of not-for-profit organizations are unlike business enterprises. Resources do not belong to a defined class of owners, only the not-for-profit entity itself and the mission for which it was formed. The net assets represent the difference between the not-for-profit organization's assets and liabilities. Choice "B" is incorrect. Ownership interest is not an appropriate characterization of the net assets of a nongovernmental not-for-profit organization. Ownership interests do not exist as they would in commercial settings. Choice "C" is incorrect. Donor's interest is not an appropriate characterization of the net assets of a nongovernmental not-for-profit organization. Donors do not have a direct interest in the resources or net assets of a not-for-profit organization. Choice "D" is incorrect. Equity interest is not an appropriate characterization of the net assets of a nongovernmental not-for-profit organization. Equity interests do not exist as they would in commercial settings.

A company had the following outstanding shares as of January 1, Year 2: Preferred stock, $60 par, 4%, cumulative = 10,000 shares Common stock, $3 par = 50,000 shares On April 1, Year 2, the company sold 8,000 shares of previously unissued common stock. No dividends were in arrears on January 1, Year 2, and no dividends were declared or paid during year 2. Net income for Year 2 totaled $236,000. What amount is basic earnings per share for the year ended December 31, Year 2? A. $3.66 B. $3.79 C. $4.07 D. $4.21

*B. $3.79* Explanation Choice "B" is correct. Basic earnings per share is calculated using the following formula: Income available to common shareholders / Weighted average number of common shares outstanding *Step 1*: The first step is to compute the income available to common shareholders. This amount is net income of $236,000 less dividends accumulated in the period on cumulative preferred stock, regardless of whether or not the dividends have been paid. For this company, income available to common shareholders is *$236,000 less $24,000 (4% × $60 × 10,000) = $212,000.* *Step 2*: The second step is to compute the weighted average number of common shares outstanding. This would be calculated as follows: Shares outstanding at the beginning of the period *50,000 shares* + Shares sold on April 1, Year 2 on a weighted basis (8,000 × 9/12) *6,000 shares * =Weighted average number of common shares outstanding for the entire period *56,000 shares* *Step 3*: Step 3 is the calculation of the basic earnings per share, which is $212,000 / 56,000 shares = $3.79.

During the current year, Comma Co. had outstanding: 25,000 shares of common stock, 8,000 shares of $20 par, 10% cumulative preferred stock, and 3,000 bonds that are $1,000 par and 9% convertible. The bonds were originally issued at par, and each bond was convertible into 30 shares of common stock. During the year, net income was $200,000, no dividends were declared, and the tax rate was 30%. What amount was Comma's basic earnings per share for the current year? A. $3.38 B. $7.36 C. $7.55 D. $8.00

*B. $7.36* Basic EPS = (Net Income - Cumulative PS Dividend) / Weighted Average Common Shares Outstanding (OR [NI-PD]/WACSO) =[$200,000 - (8,000 shares x $20 par x 10%)]/25,000 CS shares =$7.36

X Co. had the following stock transactions during the fiscal year ended June 30, Year 2: Beginning stock balance, July 1, Year 1 100,000 shares 2:1 stock split, September 30, Year 1 Issuance of additional shares, January 1, Year 2 50,000 shares Repurchase of shares, June 23, Year 2 1,040 shares What was X Co.'s weighted average number of shares outstanding at June 30, Year 2: A. 151,040 B. 224,980 C. 225,140 D. 251,040

*B. 224,980* Explanation Choice "B" is correct. The weighted average number of shares outstanding is computed by applying the ratio of the period the shares are outstanding to the total shares in each transaction for sales and repurchases. Stock splits are handled as if they had occurred at the beginning of the year. The weighted average is computed as follows: Beginning balance 100,000 x 12/12 = 100,000 Stock split 100,000 x 12/12 = 100,000 Sale of shares 50,000 x 6/12 = 25,000 Repurchase 1,040 x *1/52* = (20) =Total 224,980 (OR you can use 7/365 or 7/360 or [7/30]/12 instead of 1/52)

A storm damaged the roof of a new building owned by K-9 Shelters, a not-for-profit organization. A supporter of K-9, a professional roofer, made required minor repairs to the roof at no charge. In K-9's statement of activities, the damage and repair of the roof should: A. Be reported by note disclosure only. B. Be reported as an increase in both expenses and contributions. C. Be reported as an increase in both net assets and contributions. D. Not be reported

*B. Be reported as an increase in both expenses and contributions.* Explanation Choice "B" is correct. Donated services are recognized if the services received either (1) create or enhance nonfinancial assets, or (2) require specialized skills; are provided by individuals possessing those skills; and would typically need to be purchased if not provided by donation (donated services recognized *SOME* of the time). The roofer's specialized skills were needed to repair the roof that would have been repaired otherwise. The following entry would be made to record the minor repairs to the damaged roof: DR: Expense $ XXX CR: Contributions $ XXX

A not-for-profit voluntary health and welfare organization should report a contribution for the construction of a new building as cash flows from which of the following in the statement of cash flows? A. Operating activities. B. Financing activities. C. Capital financing activities. D. Investing activities.

*B. Financing activities.* Explanation Choice "B" is correct. *Cash received* with *donor-imposed restriction* limiting its use to *long-term purposes* (such as construction of a new building) is displayed as a *financing activity* on the statement of cash flows of a not-for-profit organization. Choice "A" is incorrect. Cash received with donor imposed restrictions limiting its use to long term purposes is a financing activity, not an operating activity, on the statement of cash flows of a not-for-profit organization. Operating activities include cash received for purposes without donor restrictions or used in the central ongoing activities of the organization. Choice "C" is incorrect. This is a distracter. There is no classification in the statement of cash flows used for not for profit organizations entitled "Capital financing activities." This classification is used in the statement of cash flows prepared for a proprietary fund of a government. Choice "D" is incorrect. Cash received with donor imposed restrictions limiting its use to long term purposes is a financing activity, not an investing activity, on the statement of cash flows of a not-for-profit organization. Investing activities include sources of cash from the sale of long lived assets or uses of cash associated with the acquisition of long lived assets.

Which of the following items, if dilutive and if other conditions are met, would enter into the determination of the weighted average shares outstanding to be used in the basic earnings per share (basic EPS) calculation? I. Stock options. II. Contingent shares. A. I only. B. II only. C. Both I and II. D. Neither I nor II.

*B. II only.* Explanation Choice "B" is correct. Contingent shares (that are dilutive) are included in the calculation of basic earnings per share (EPS) if (and as of the date) all conditions for issuance are met. Stock options do not enter into the calculation of basic EPS. Choices "A" and "C" are incorrect, because stock options do not enter into the calculation of the basic EPS, but will enter into the calculation of dilutive EPS if dilutive (i.e., the average market price of the common stock during the period exceeds the exercise price of the option). Choice "D" is incorrect. If contingent shares are dilutive (on EPS) and meet conditions for issuance, they would enter into the calculation of basic EPS.

Famous, a nongovernmental not-for-profit art museum, has elected not to capitalize its donated permanent collections. In Year 1, a bronze statue was stolen. The statue was not recovered and insurance proceeds of $35,000 were paid to Famous in Year 2. This transaction would be reported in: I. The statement of activities as revenues without donor restrictions. II. The statement of cash flows as cash flows from investing activities. A. I only. B. II only. C. Both I and II. D. Neither I nor II.

*B. II only.* Explanation Choice "B" is correct. Investing activities in the statement of cash flows should include proceeds from the sale of long lived assets or insurance proceeds associated with the loss of long lived assets. Entities that do not capitalize their permanent collections display insurance proceeds from lost, stolen or damaged items on the statement of activities in an appropriate change in net asset classification separate from revenues, expenses, gains, and losses. Contributed collection items should not be recognized as revenues or gains if collections are not capitalized. Cash flows from purchases, sales, and insurance recoveries of unrecognized, noncapitalized collection items should be reported as investing activities in a statement of cash flows. A not-for-profit organization that does not recognize and capitalize its collections should report the following on the face of its statement of activities separately from revenues, expenses, gains, and losses: -Costs of collection items purchased as a decrease in the appropriate class of net assets -Proceeds from sale of collection items as an increase in the appropriate class of net assets -Proceeds from insurance recoveries of lost or destroyed collection items as an increase in the appropriate class of net assets

The Appleton Museum, a not-for-profit organization, sells a painting donated to its collection to a private investor. The museum plans to use the proceeds associated with the sale to purchase additional works of art for display. In its statement of cash flows, the museum typically would display proceeds from the sale as cash flows from: A. Operating activities. B. Investing activities. C. Financing activities. D. Donor-restricted resources, which are not displayed on the face of the statement of cash flows.

*B. Investing activities.* *Rule*: Investing activities include *proceeds from the sale of works of art* or *purchases of works of art*. Choice "B" is correct. Sales of collections are displayed on the statement of cash flows within investing activities.

On a nongovernmental, not-for-profit entity's statements of activities, which of the following amounts should not be netted together under any circumstances? A. Revenues and expenditures from the sale of used equipment. B. Revenues and expenditures from an annual fundraising campaign. C. Investment income, custodial fees, and other advisory expenditures. D. Gains and losses from exchange rates or other foreign currency translations.

*B. Revenues and expenditures from an annual fundraising campaign.* Explanation Choice "B" is correct. Special events that represent ongoing and major activities of the not-for-profit organization, such as an annual fundraising campaign, should fully display gross fundraising revenues and fundraising expenses. While peripheral or incidental events may be presented on a net basis, major fundraising campaigns will present revenues and expenses separately. Choice "A" is incorrect. Not-for-profit organizations account for disposal of equipment by netting proceeds ("revenues") against carrying value (expired cost or "expenditures") to report a gain or loss on disposal in a manner consistent with commercial enterprises. Choice "C" is incorrect. Investment returns are reported net of any related investment expense. Choice "D" is incorrect. Gains and losses associated with changes in foreign currency exchange rates are presented net consistent with commercial accounting standards.

What is a primary purpose and focus of the statement of activities for a nongovernmental, not-for-profit organization? A. To demonstrate the ability of the organization to meet donor-imposed restrictions on resources. B. To demonstrate how the organization's resources are used in providing various programs and services. C. To provide relevant information about the cash receipts and cash payments of the organization during a period. D. To provide a cost-benefit analysis of the use of the organization's resources.

*B. To demonstrate how the organization's resources are used in providing various programs and services.* Explanation Choice "B" is correct. The primary purpose and focus of the statement of activities (the approximate equivalent of an income statement in commercial settings) for a nongovernmental, not-for-profit organization is to demonstrate how the organization's resources are used in providing various programs and services. Choice "A" is incorrect. The primary purpose and focus of the statement of activities (the approximate equivalent of an income statement in commercial settings) for a nongovernmental, not-for-profit organization is to demonstrate how the organization's resources are used in providing various programs and services, not to demonstrate the ability of the organization to meet donor-imposed restrictions on resources. Choice "C" is incorrect. The primary purpose and focus of the statement of activities (the approximate equivalent of an income statement in commercial settings) for a nongovernmental, not-for-profit organization is to demonstrate how the organization's resources are used in providing various programs and services, not to provide relevant information about the cash receipts and cash payments of the organization during the period. Cash activity is reported in the statement of cash flows. Choice "D" is incorrect. The primary purpose and focus of the statement of activities (the approximate equivalent of an income statement in commercial settings) for a nongovernmental, not-for-profit organization is to demonstrate how the organization's resources are used in providing various programs and services, not to provide a cost-benefit analysis of the use of the organization's resources.

A nongovernmental not-for-profit animal shelter receives contributed services from the following individuals valued at their normal billing rate: Veterinarian provides volunteer animal care $8,000 Board member (a CPA) volunteers to prepare books for audit 4,500 Registered nurse volunteers as an extra receptionist 3,000 Teacher provides volunteer dog walking 2,000 What amount should the shelter record as contribution revenue? A. $8,000 B. $11,000 C. $12,500 D. $14,500

*C. $12,500* Explanation Choice "C" is correct. Donated services are recorded at fair value if they create or enhance a nonfinancial asset or the required specialized skills the provider possesses and would otherwise have been purchased by the organization receiving the services. The *services provided by the veterinarian and the board member represent specialized skills* that would have required the shelter to purchase the services in the absence of the volunteers. The nurse volunteering as an extra receptionist and volunteer dog walking do not require specialized skills and may not have been otherwise needed so they are not recorded as revenue.

Marble Co. prepared its statement of cash flows using the following amounts: Net decrease in fixed assets $(3,750) Depreciation expense 13,000 Gain on sale of equipment, (net book value, $3,250) 1,250 Capital expenditures 12,500 Marble reported a net income of $20,000 at year-end. What amount should Marble report as net cash provided by operating activities? A. $19,500 B. $29,250 C. $31,750 D. $33,000

*C. $31,750* =$20,000 NI - 1,250 gain + 13,000 depreciation Explanation Choice "C" is correct. The company adjusts the net income of $20,000 by adding back the depreciation expense of $13,000. Depreciation expense is a noncash expense that reduces net income. The company also adjusts net income by subtracting the gain of $1,250. Gains increase net income. Because this gain is accounted for in the cash inflow from the sale of equipment (that is reported in cash flows from investing activities), it is adjusted out of the operating activities section by subtracting it.

During Year 2, Xan, Inc. had the following activities related to its financial operations: Payment for the early retirement of long-term bonds payable (carrying amount $370,000) $375,000 Distribution in Year 2 of cash dividend declared in Year 1 to preferred shareholders 31,000 Carrying amount of convertible preferred stock in Xan, converted into common shares 60,000 Proceeds from sale of treasury stock (carrying amount at cost, $43,000) 50,000 Xan uses U.S. GAAP. In Xan's Year 2 statement of cash flows, net cash used in financing operations should be: A. $265,000 B. $296,000 C. $356,000 D. $358,000

*C. $356,000* Explanation Choice "C" is correct. $356,000 net cash used in financing operations. *Note*: Conversion of preferred stock into common stock is a noncash financing disclosure. Payment to retire bonds $(375,000) Payment of dividend (31,000) Proceeds from Treasury stock 50,000 Total $(356,000) Note that under IFRS, dividend payments may be reported in the operating section or the financing section.

The following information is relevant to the computation of Chan Co.'s earnings per share to be disclosed on Chan's income statement for the year ending December 31: -Net income for 2002 is $600,000. -$5,000,000 face value 10-year convertible bonds outstanding on January 1. The bonds were issued four years ago at a discount which is being amortized in the amount of $20,000 per year. The stated rate of interest on the bonds is 9%, and the bonds were issued to yield10%. Each $1,000 bond is convertible into 20 shares of Chan's common stock. -Chan's corporate income tax rate is 25%. Chan has no preferred stock outstanding, and no other convertible securities. What amount should be used as the numerator in the fraction used to compute Chan's diluted earnings per share assuming that the bonds are dilutive securities? A. $130,000 B. $247,500 C. $952,500 D. $1,070,000

*C. $952,500* Explanation Choice "C" is correct. The numerator in the diluted EPS computation is equal to income available to common shareholders plus the after-tax interest expense that would not have been incurred if the bonds had been converted. Note that the company is using straight-line amortization rather than effective interest amortization. Under straight-line amortization, interest expense of $470,000 is reported each period. The interest expense is equal to the interest payment of $450,000 ($5,000,000 face x 9% stated rate) plus the discount amortization of $20,000. Therefore, the numerator is calculated as: *Income available to common shareholders + Interest of dilutive securities* = Net Income + [((Interest = Face x interest rate) + annual discount amortization) x (1 - Tax rate)] = $600,000 + [(($5,000,000 x 9%) + $20,000) x (1 - 25%)] = $600,000 + [$470,000 x (1 - 25%)] = $600,000 + $352,500 = $952,500

The Marble Foundation Inc., a not-for-profit organization, is financially interrelated with its beneficiary organization, Boulder University. Receipts of the Marble Foundation would be displayed/ disclosed in the Boulder University financial statements as: A. A note disclosure. B. An equity transaction within the net asset classification on the balance sheet. C. A change in the university's interest in the foundation on the statement of activities. D. An increase and decrease in donor-restricted conditional support.

*C. A change in the university's interest in the foundation on the statement of activities.* Explanation Choice "C" is correct. Beneficiaries (e.g., Boulder University) with a financial interest in recipient organizations (e.g., Marble Foundation) recognize the change in their interest of the recipient organization on their statement of activities. The interest in the net assets of the recipient is adjusted for the beneficiary's share of the change with the following entry: DR: Interest in net assets XXX CR: Interest in Marble Foundation net assets (statement of activities) XXX Choice "A" is incorrect. Beneficiaries with a financial interest in recipient organizations do not limit their reporting of recipient equity to disclosures only. Choice "B" is incorrect. Beneficiaries with a financial interest in recipient organizations report changes in recipient interest through their statements of activities, not directly within the net asset classification on the balance sheet. Choice "D" is incorrect. "Conditional support" is a contradiction in terms and represents a distracter.

Which of the following financial categories are used in a nongovernmental not-for-profit organization's statement of financial position? A. Net assets, income, and expenses. B. Income, expenses, and net assets without donor restrictions. C. Assets, liabilities, and net assets. D. Changes in net assets without donor restrictions and with donor restrictions.

*C. Assets, liabilities, and net assets.* Explanation Choice "C" is correct. A not-for-profit organization classifies balances in its statement of financial position as assets, liabilities, and net assets. Choice "A" is incorrect. A not-for-profit organization classifies balances in its statement of financial position as assets, liabilities, and net assets, not net assets, income, and expenses. The statement of activities generally uses income and expense classifications along with net assets. Choice "B" is incorrect. A not-for-profit organization classifies balances in its statement of financial position as assets, liabilities, and net assets. By contrast, the statement of activities generally uses income and expense classifications along with net assets by classification, including net assets without donor restrictions. Choice "D" is incorrect. A not-for-profit organization classifies balances in its statement of financial position as assets, liabilities, and net assets. By contrast, the statement of activities generally accounts for changes in all classifications of net assets.

A nongovernmental not-for-profit organization borrowed $5,000, which it used to purchase a truck. In which section of the organization's statement of cash flows should the transaction be reported? A. In cash inflow and cash outflow from investing activities. B. In cash inflow and cash outflow from financing activities. C. In cash inflow from financing activities and cash outflow from investing activities. D. In cash inflow from operating activities and cash outflow from investing activities.

*C. In cash inflow from financing activities and cash outflow from investing activities.* Explanation Choice "C" is correct. For a nongovernmental not-for-profit organization, the borrowing would be a cash inflow from financing activities, and the purchase of the truck would be a cash outflow from investing activities. For a nongovernmental not-for-profit organization, the commercial format for the statement of cash flows is followed. Choice "A" is incorrect. The cash inflow for the borrowing is a financing activity, not an investing activity. Choice "B" is incorrect. The cash outflow for the purchase of the truck is an investing activity, not a financing activity. Choice "D" is incorrect. The cash inflow for the borrowing is a financing activity, not an operating activity.

Rogue Scholars Inc. acquired a new office building by giving 50,000 shares of common stock along with cash to the former owner. Additional details are: Fair value of stock $19 per share Par value of stock $10 per share Cash given up $750,000 Fair value of building $1,800,000 On Rogue's statement of cash flows, this transaction would be reported A. In the investing section in the amount of $1,800,000. B. In the financing section in the amount of $950,000. C. In the investing section in the amount of $750,000. D. In the financing section in the amount of $750,000.

*C. In the investing section in the amount of $750,000.* Explanation Choice "C" is correct. The investing section of the statement of cash flows would show an outflow of cash in the amount of $750,000.

Midtown Church received a donation of marketable equity securities from a church member. The securities had appreciated in value after they were purchased by the donor, and they continued to appreciate through the end of Midtown's fiscal year. At what amount should Midtown report its investment in marketable equity securities in its year-end balance sheet? A. Donor's cost. B. Market value at the date of receipt. C. Market value at the balance sheet date. D. Market value at either the date of receipt or the balance-sheet date.

*C. Market value at the balance sheet date.* Explanation Choice "C" is correct. In the case of non-profit organizations such as churches, marketable equity securities are reported at market value as of the balance sheet date. Therefore, Midtown Church would report the investment at market value at the date of the balance sheet date. Choice "A" is incorrect. Marketable securities are recorded at their fair value at the balance sheet date, not donor cost. Choice "B" is incorrect. Marketable securities are recorded at fair value at date of receipt but marked to market at year end to reflect market value at the balance sheet date. Choice "D" is incorrect. Securities valuation does not allow for alternative values or choices as of the balance sheet date.

Which of the following types of information would be included in total net assets in the statement of financial position for a nongovernmental not-for-profit organization? A. Total current net assets and total other assets. B. Total current assets and restricted assets. C. Net assets without donor restrictions and net assets with donor restrictions. D. Net assets without donor restrictions, net assets with donor restrictions, and total current assets.

*C. Net assets without donor restrictions and net assets with donor restrictions.* Explanation Choice "C" is correct. The components of net assets of not-for-profit organizations are classified in two possible ways: with donor restrictions and without donor restrictions. Choice "A", "B", and "D" are incorrect. The information included in the net assets section of a not-for-profit organization pertains exclusively to classifications as to restriction, not to maturity.

At which of the following amounts should a nongovernmental not-for-profit organization report investments in debt securities? A. Potential proceeds from liquidation sale. B. Discounted expected future cash flows. C. Quoted market prices. D. Historical cost.

*C. Quoted market prices.* Explanation Choice "C" is correct. Not-for-profit organization investments are displayed at their fair value at year-end. The best most reliable measure of fair value is quoted market prices (assuming they are available). All debt securities and those equity securities that have readily determinable fair values are measured at fair value in the statement of financial position. Choice "A" is incorrect. Fair value, not net realizable value (proceeds from a potential liquidation) is the valuation amount used for investments at year-end. Choice "B" is incorrect. Although discounted future cash flows may approximate fair value (and serve as the basis for determining fair value), the best answer is the quoted market price. If available, quoted market prices are the best measure of fair value. Choice "D" is incorrect. Fair value, not historical cost, is the valuation amount used for investments at year-end.

How should a nongovernmental not-for-profit organization classify gains and losses on investments purchased with endowment assets with donor restrictions? A. Gains may not be netted against losses in the statement of activities. B. Gains and losses can only be reported net of expenses in the statement of activities. C. Unless explicitly restricted by donor or law, gains and losses should be reported in the statement of activities as increases or decreases in net assets without donor restrictions. D. Unless explicitly restricted by donor or law, gains and losses should be reported in the statement of activities as increases or decreases in board-designated net assets without donor restrictions.

*C. Unless explicitly restricted by donor or law, gains and losses should be reported in the statement of activities as increases or decreases in net assets without donor restrictions.* Explanation Choice "C" is correct. Gains and losses should be reported in the statement of activities as increases or decreases in net assets without restrictions unless otherwise stipulated by donor or by law. In the event restrictions are associated with earnings on investments restricted in perpetuity, losses are absorbed by the endowment. Choice "A" is incorrect. Gains and losses may be netted; however, the question pertains to classification rather than valuation of gains and losses. Choice "B" is incorrect. Gains and losses may be reported gross or net (or in combination) with related expenses. The question pertains to classification rather than valuation of gains and losses. Choice "D" is incorrect. Gains and losses on investments with donor restrictions in perpetuity are typically not recognized as changes to board-designated net assets. Gains and losses should be reported in the statement of activities as increases or decreases in net assets without donor restrictions (with no assumed board designation for future use) unless otherwise stipulated by donor or by law.

RST Charities received equity securities valued at $100,000 as a gift without donor restrictions at the beginning of Year 1. During Year 1, RST received $5,000 in dividends from these securities; at year-end, the securities had a fair market value of $110,000. By what amount did these transactions increase RST's net assets? A. $100,000 B. $105,000 C. $110,000 D. $115,000

*D. $115,000* Explanation Choice "D" is correct. RST's net assets increased $115,000 as a result of the contribution of equity securities; the increase in market value and the dividends received is computed as follows: Equity security received $100,000 Change in market value 10,000 Fair market value at year-end 110,000 Dividends received 5,000 Total $115,000 All debt securities and those equity securities that have readily determinable fair values are measured at fair value in the statement of financial position. Gains and losses on investments are reported in the statement of activities. Investment income (e.g., dividends and interest) is reported in the period earned as an increase in net assets. Choice "A" is incorrect. The proposed solution excludes changes in market value and dividends from increases in net assets in error. Both the change in market value and the dividend would be considered as an increase in net assets. Choice "B" is incorrect. The proposed solution excludes changes in market value from increases in net assets in error. Both the change in market value and the dividend would be considered as an increase in net assets. Choice "C" is incorrect. The proposed solution excludes dividends from increases in net assets in error. Both the change in market value and the dividend would be considered as an increase in net assets.

For the year ended December 31, Ion Corp. had cash inflows of $25,000 from the purchases, sales, and maturities of held-to-maturity securities and $40,000 from the purchases, sales, and maturities of available-for-sale securities. What amount of net cash from investing activities should Ion report in its cash flow statement? A. $0 B. $25,000 C. $40,000 D. $65,000

*D. $65,000* Explanation Choice "D" is correct. Net cash from investing activities is $65,000 ($25,000 + $40,000) because investing activities include cash flows from both available-for-sale and held-to-maturity security transactions.

A voluntary health and welfare organization received a $700,000 endowment with donor restrictions in perpetuity during the year. The donor stipulated that the income and investment appreciation be used to maintain its senior center. The endowment fund reported a net investment appreciation of $80,000 and investment income of $50,000. The organization spent $60,000 to maintain its senior center during the year. What amount of change in net assets with donor restrictions should the organization report? A. $50,000 B. $70,000 C. $130,000 D. $770,000

*D. $770,000* Explanation Choice "D" is correct. In this question, the donor provided $700,000 and further stipulated that the income ($50,000) and the investment appreciation ($80,000) be used in maintain the senior center. The initial contribution and income as well as the investment appreciation represent increases in donor-restricted net assets (total of $830,000). The actual $60,000 spent represents a decrease in donor-restricted net assets reclassified for inclusion in changes in net assets without donor restrictions. Consequently, the total change is a $770,000 increase. Endowment $700,000 +Income (realized) 50,000 +Appreciation (unrealized) 80,000 =Total donor-restricted revenue 830,000 -Expenses satisfying donor's stipulations (60,000) =Net change in net assets with donor restrictions $770,000 Choice "A" is incorrect. The change in net assets with donor restrictions is not only the investment income. Choice "B" is incorrect. Although the change in net assets with donor restrictions will include income and appreciation net of expense amounts (reclassification of net assets with donor restrictions upon satisfaction of donor stipulations), it will also include the endowment contribution. Choice "C" is incorrect. The change in donor-restricted net assets is not just the income and investment appreciation. The $60,000 must be taken into account as well.

During Year 7, Jones Foundation received the following support: -A cash contribution of $875,000 to be used at the board of directors' discretion -A promise to contribute $500,000 in Year 8 from a supporter who has made similar contributions in prior periods -Contributed legal services with a value of $100,000, which Jones would have otherwise purchased At what amounts would Jones classify and record these transactions? Revenues and Gains *Without* Donor Restrictions/ Revenues and Gains *With* Donor Restrictions A. $1,375,000/ $0 B. $875,000/ $500,000 C. $975,000/ $0 D. $975,000/ $500,000

*D. $975,000/ $500,000 * Explanation Choice "D" is correct. Contributions available for use at the board's discretion are classified as revenues and gains without donor restrictions. No specific requirement is associated with that revenue. Contributed services are similarly considered to be revenues and gains without restrictions. Services are rendered and consumed simultaneously as expenses. Expenses are classified as reductions of net assets without donor restrictions. To be restricted, the donation must be restricted by the donors, creditors, grantors, or laws or regulations. A promise to contribute carries an implied time restriction until conditions (collection) or eligibility requirements (date, etc.) have been satisfied. Classification of revenues is computed as follows: Revenues and Gains *Without* Donor Restrictions/ Revenues and Gains With Donor Restrictions Cash contribution $875,000 / 0 Promise to contribute 0 / $500,000 Donated services 100,000 / 0 Total $975,000 / $500,000

A not-for-profit organization is exempt from reporting which of the following contributed services as revenue? A. A CPA prepares the organization's tax return. B. A special education teacher tutors children with learning disabilities. C. A carpenter builds shelves for the office. D. An attorney solicits contributions on behalf of the organization.

*D. An attorney solicits contributions on behalf of the organization.* Explanation Choice "D" is correct. The value of an attorney's time spent soliciting contributions on behalf of a not-for-profit organization would not need to be recognized as contribution revenue and a related expense. Contribution solicitation does not meet the criteria for recognition. Donated services are recognized as a contribution at fair value when those services create or enhance a nonfinancial asset or they require specialized skills that would have been otherwise purchased and can be measured easily (valued at fair value). Services are recognized SOME of the time. Choice "A" is incorrect. A not-for-profit would not be exempt from recognizing the value of a CPA's tax- return preparation service. The CPA's specialized skill used to help the not-for-profit organization meet tax-filing requirements valued at the accountant's usual and customary fee meet the criteria for recognition. Choice "B" is incorrect. A not-for-profit organization would not be exempt from recognizing the value of the time spent by a special education teacher tutoring children with learning disabilities. The teacher's special skill to meet the needs of a served population at the teacher's usual fee or salary meets the criteria for recognition. Choice "C" is incorrect. A not-for-profit organization would not be exempt from recognizing the value of a carpenter's service building shelves for the organization. The carpenter has a required specialized skill and has enhanced a nonfinancial asset.

The Jones family lost its home in a fire. On December 25, Year 1, a philanthropist sent money to the Amer Benevolent Society, a private not-for-profit organization, to purchase furniture for the Jones family. During January Year 2, Amer purchased this furniture for the Jones family. How should Amer report the receipt of the money in its Year 1 financial statements? A. As a contribution without donor restrictions. B. As a contribution with donor restrictions. C. As an increase to board-designated net assets (for future expenditures) D. As a liability.

*D. As a liability.* Explanation Choice "D" is correct. The Amer Benevolent Society received a donation from a philanthropist for the benefit of a specific beneficiary and the Amer Benevolent Society has *no variance power* (discretion) relative to the use of the contribution. Receipt of this cash is not a contribution received, it is a liability. Choice "A" is incorrect. The contribution received is subject to a specific donor-imposed restriction. In addition, because the not-for-profit entity has no variance power, the receipt is accounted for as a liability, not as a contribution on the statement of activities. Choice "B" is incorrect. Although the Amer Benevolent Society received a restricted contribution whose restriction can be satisfied by the purchase of furniture, the Society has no variance power over the resources and would therefore account for the transaction as a liability on its statement of financial position, not a contribution on its statement of activities. Choice "C" is incorrect. The contribution received by the Amer Benevolent Society carries specific donor restrictions and would not increase board-designated net assets. Board designations identify components of net assets without donor restrictions.

Which of the following classifications is required for reporting of expenses by all not-for-profit organizations? A. Natural classification in the statement of activities or notes to the financial statements. B. Functional classification in the statement of activities or notes to the financial statements. C. Functional classification in the statement of activities and natural classification in a matrix format in a separate statement. D. Functional classification in the statement of activities and natural classification analyzed by function in the notes to the financial statements.

*D. Functional classification in the statement of activities and natural classification analyzed by function in the notes to the financial statements.* Explanation Choice "D" is correct. A not-for-profit organization needs to report its expenses in the statement of activities by their functional classification (program classification, supporting activities, fund-raising, etc.) and disclose the expenses in a natural classification by function in the notes to the financial statements. Choice "A" is incorrect. Expenses are classified by function in the statement of activity and disclosed by natural classification and function in the notes to the financial statements. Choice "B" is incorrect. A not-for-profit organization needs to report its expenses in the statement of activities by their functional classification (program classification, supporting activities, fund-raising, etc.), but must further disclose the naturally classified expenses by function. Note disclosures are not optional. Choice "C" is incorrect. A not-for-profit organization needs to report its expenses in the statement of activities by their functional classification (program classification, supporting activities, fundraising, etc.). Although there is no requirement that the organization must also report the expenses in a natural classification in a separate statement, that information is disclosed.

Valley's community hospital normally includes proceeds from sale of cafeteria meals in: A. Deductions from dietary service expenses. B. Ancillary service revenues. C. Patient service revenues. D. Other revenues.

*D. Other revenues.* Explanation Choice "D" is correct. Cafeteria revenue of a hospital is classified as other revenues. Choice "A" is incorrect. Cafeteria revenue is not offset against dietary service expenses. Choice "B" is incorrect. There is no such category as ancillary service revenue. Choice "C" is incorrect. Patient service revenue is the revenue earned for the services rendered to the patients. It does not include cafeteria revenue.

Cash flows from financing (CFF) - examples

*borrowing money and repaying amounts borrowed (debt and equity)* -Payment of dividends (dividends paid) -Issuance of common stock Issuance of bonds payable -Proceeds from sale of treasury stock -Treasury stock repurchased -Payment for the early retirement of long-term bonds payable (payment to retire bonds) -Repayment of long-term debt -Collection of proceeds from a notes payable -Receiving cash from issuing stock/debt spending cash to repurchase shares

*Not* Financially Interrelated: *Without* Variance Power

-Assets are valued at *fair value* -Assets are recognized a *contribution* when received and *expensed when distributed* to the beneficiary -Journal entry: DR: Asset CR: Contribution

*Financially Interrelated*: *With or Without* Variance Power

-Assets are valued at *fair value* -Assets are recognized a *contribution* when received and *expensed when distributed* to the beneficiary -Journal entry: DR: Asset CR: Contribution -A recipient entity and a specified beneficiary are financially interrelated entities if (1) one of the entities has the ability to influence the operating and financial decisions of the other entity and (2) one of the entities has an ongoing economic interest in the net assets of the other. -one of the entities has the ability to influence the operating and financial decisions of the other entity and one of the entities has an ongoing economic interest in the net assets of the other

*Not* Financially Interrelated: *With* Variance Power

-Assets are valued at *fair value* -the recipient recognizes a *liability* to the beneficiary -Journal entry: DR: Asset CR: Refundable advance liability -Assets transferred to recipient organizations are *not* contributions and are accounted for as liabilities when *any one* of the following conditions are met: 1) The resource provider can change the beneficiary 2) The resource provider's asset transfer is conditional or otherwise revocable or repayable 3) The resource provider controls the recipient organization and specifies an unaffiliated beneficiary 4) The resource provider specifies itself or its affiliate as the beneficiary and does *not* qualify for equity accounting

Not a cash flow - examples

-Notes payable -U.S. Treasury bill

Cash flows from investing (CFI) - examples

-Purchase of *LT investments* (i.e. purchase of bonds) -Purchase of *PPE* -Sale of *PPE* -Collection of *notes receivable* from a related party (Collection of loans to other entities) -*Common stock purchased from another company* -Purchase/sale of *Available For Sale security/Held-to maturity security* -Purchase of A.S., Inc. bonds (or some other company's bonds)

Cash flows from operations (CFO) - examples

-change in accounts receivable -change in accounts payable -interest *paid* [on bank note] -Cash received from customers -Cash paid to employees -*Trading securities* purchased -Dividends *received* -Interest *received* -Other: amounts received to *settle lawsuits*, *proceeds* of certain *insurance settlements*, and cash refunds from suppliers

Azim Services, a nongovernmental, not-for-profit organization, received dues of $100 from its members. Azim provided its members with a newsletter that had a $25 value. All other services were valued at $10 per member. What is the amount of contribution made to Azim by each member? A. $10 B. $25 C. $65 D. $100

Explanation Choice "C" is correct. The *difference between the contributions made by a donor and the fair value of any premium transferred* is classified as contribution revenue. Contribution revenue is computed as follows: Dues $100 Less: Newsletter fair value (25) Other services (10) Net contribution $ 65 Choice "A" is incorrect. The difference between the contributions made by a donor and the fair value of any premium transferred is classified as contribution revenue. The proposed solution suggests that contributions are equal to the value of the services provided by Azim Services. Choice "B" is incorrect. The difference between the contributions made by a donor and the fair value of any premium transferred is classified as contribution revenue. The proposed solution suggests that contributions are equal to the value of the newsletter provided by Azim Services. Choice "D" is incorrect. The difference between the contributions made by a donor and the fair value of any premium transferred is classified as contribution revenue. The proposed solution suggests that contributions are equal to the total amount paid to Azim Services.

During the year, Private College received the following: -A $50,000 pledge without donor restrictions to be paid the following year. -A $25,000 cash gift donor-restricted for scholarships. -A notice from a recent graduate that the college is named as a beneficiary of $10,000 in that graduate's will. What amount of contribution revenue should Private College report in its statement of activities? A. $25,000 B. $35,000 C. $75,000 D. $85,000

Explanation Choice "C" is correct. Total contribution revenue is $75,000. Classification of the contribution revenue is not relevant. The $50,000 pledge is reported as contribution revenue on the statement of activities, even though it is to be paid (and collected) in the following year. The $25,000 cash gift is reported as contribution revenue on the statement of activities, even though it is donor-restricted. The "notice" from a recent graduate that the college is named as a beneficiary is *not* definite enough for the recording of revenue (*the recent graduate may live a long time and may change his or her will at any time*). Total contribution revenue is thus $75,000. Choice "A" is incorrect. The $50,000 pledge is reported as contribution revenue on the statement of activities, not just the $25,000 cash gift. Choice "B" is incorrect. The $25,000 donor-restricted gift is an element of recognized contribution revenue on the statement of activities, but the $10,000 "notice" is not. Choice "D" is incorrect. The $10,000 "notice" is not reported as contribution revenue on the statement of activities, although the other two amounts related to actual receipts or receivables are recognized.