Gov't & NFP Ch. 13
Which of the following characteristics of a brochure prepared by a nonprofit is not relevant to whether the cost of the brochure can be allocated between program and fundraising functions? a. Page count b. Content c. Purpose d. Audience
A The appropriate accounting for the costs depends on three factors or criteria—the brochure's purpose, the audience it is intended to reach, and its contents.
The FASB requires nonprofits to report net assets in which categories? a. Current and noncurrent b. Net assets without donor restrictions and net assets with donor restrictions c. Net assets in endowment funds and net assets with board designations d. Net assets with donor restrictions and net assets with non-donor contractual restrictions
B Nonprofits must classify and report net assets in one of two classes—net assets with donor restrictions and net assets without donor restrictions.
In nonprofit accounting, under what circumstances does a reclassification occur? a. Net assets with donor restrictions are released from time or purpose restrictions b. Net assets without donor restrictions are reclassified net assets with donor restrictions c. Resources of the current unrestricted fund are transferred to the land, building and equipment fund. d. When the nonprofit wants to use the money, without regard to restrictions
A A purpose or time restriction causes a nonprofit to report the contribution as support with donor restrictions. GAAP requires, however, that all expenses must be reported in the statement of activities as decreases in net assets without donor restrictions. To accomplish this result, nonprofits need to make an additional journal entry to reclassify net assets with donor restrictions to net assets without donor restrictions when the purpose for which the contribution was made has been fulfilled or when the stipulated time period has elapsed.
The Turtle Island Singers receive three gifts during the year 2018: (a) $3,000, which may be used for any purpose at any time; (b) $5,000, which must be used for a special concert given in a nursing home; and (c) $1,000, which may be used for any purpose, but only in the year 2019. When it receives the gifts, how should the entity classify them: a. $3,000 as contribution revenue—support without donor restrictions and $6,000 as contribution revenue—support with donor restrictions b. $4,000 as contribution revenue—support without donor restrictions and $5,000 as contribution revenue—support with donor restrictions c. $8,000 as contribution revenue—support without donor restrictions and $1,000 as contribution revenue—support with donor restrictions d. $9,000 as contribution revenue—support without donor restrictions
A A purpose-type donor restriction is classified as donor-imposed, because they may be satisfied only by the nonprofit's performance of the specific activity. A donor may also impose time restrictions on the use of his donation. This type of restriction also causes the contribution to be classified as support with donor restrictions.
The Aurora Fund received equipment having a cost of $65,000 and a fair value of $50,000 as a gift. The donor states that the Fund should decide how to best use the gift. How should the gift be reported in the Aurora Fund's financial statements? a. As an asset measured at fair value and as revenues without donor restrictions b. As an asset measured at fair value and as revenues with donor restrictions c. As a footnote only, because gifts of equipment are not be reported on the face of financial statements d. As an asset at the amount the donor paid for it and as revenue without donor restrictions
A Contributions of assets other than cash or investments are measured at the fair value of the contributed asset. When a nonprofit receives a contribution without any donor-imposed restrictions, it should report the contribution as contribution revenues without donor restrictions.
A nonprofit arts organization receives a $40,000 gift from a donor who specifies that the gift must be used only to take disabled persons to the theater. How should the entity report the $40,000 gift in the net asset section of its statement of financial position? a. As net assets with donor restrictions b. As net assets with contractual restrictions c. As net assets without donor restrictions d. As net assets available for spending
A Donor-imposed restrictions significantly influence nonprofit accounting and financial reporting. Donor-imposed restrictions affect the purposes for which nonprofits may spend the donated resources, when they may spend them, and even whether they may spend them.
The Beowulf Fund has extensive investments resulting from contributions that are restricted in perpetuity. Given that the Fund must disclose the data used (inputs) to measure the fair value of its investments using the FASB's three-level fair value hierarchy, in what level should the fund report its investments in equity securities that it obtained from the December 31st Wall Street Journal? a. As Level 1, consisting of equity securities traded in active markets b. As Level 2, consisting of inputs other than quoted market prices c. As Level 3, consisting of unobservable inputs d. None of the above; investments in equity securities are excluded from this required disclosure
A Level 1 inputs are quoted prices in active markets for identical assets at the reporting date. Level 2 inputs are inputs other than quoted prices that are observable for the asset, either directly or indirectly. Level 3 inputs are unobservable inputs, based on the reporting entity's pricing assumptions.
Nonprofits are required to prepare their cash flows statement using three categories of cash receipts and cash payments. What are these three categories? a. Operating, investing, and financing activities b. Operating, with donor restrictions, and without donor restrictions c. Operating, investing, and capital and noncapital financing activities d. Operating, restricted, and board-designated
A The nonprofit cash flows statement is organized to show the effect of cash flows in three categories—operating, investing, and financing activities.
One big category of nonprofit entities is voluntary health and welfare organizations (VHWOs). These nonprofits receive their resources primarily from: a. Donations from the general public b. Governmental agencies c. Charges for services they provide d. All of the above
A VWHOs obtain resources primarily from donations from the general public. They also receive grants and contracts from governmental agencies to provide specific social services. And, VHWOs may provide such services as family counseling, recreation and work for youth, at no charge or low charge to the service recipients.
The National Kidney Foundation decides to present the required detail about its expenses as an additional operating statement—a statement of functional expenses. What will this statement present? a. All expenses by function b. All expenses by nature and function c. All mission expenses with investment expenses presented separately d. All management and general activity expenses, fundraising activity expenses, and in some nonprofits, membership development activity expenses
B All nonprofits are required to report expenses by nature and function in one location; that is, on the face of the statement of activities, as a schedule in the notes to the statements, or in a separate financial statement.
Which of the following financial statements is not required to be prepared by nonprofit organizations? a. Statement of financial position b. Statement of donations and contributions received c. Statement of cash flows d. Statement of activities
B All nonprofits must prepare (1) a statement of financial position (or balance sheet), (2) a statement of activities, and (3) a statement of cash flows.
Nonprofits must report expenses by program, which is any activity directly related to the organization's purpose. Which of the following is true about nonprofit programs? a. Most nonprofits have programs for fundraising b. Most nonprofits are involved in several programs c. Only donor-restricted contributions can be used for program expenses d. Programs expenses may never include management and general activity expenses.
B Although most organizations are involved in several programs, it is possible that an organization may have only one such activity.
A group of citizens donate their time to construct a building to provide shelter for the homeless, to be run by a nonprofit entity. In this situation, what is the applicable accounting rule for recognizing the fair value of the services on the face of the financial statements? a. Donations that take a form other than cash should not be recognized b. The fair value of contributed services should not be recognized unless the services require specialized skills, are provided by individuals who have those skills, and which the entity would need to be purchased if not donated c. Contributed services should be recognized at the fair value of the assets they create d. Donations should be recognized on the face of financial statements only for cash, securities, and other tangible assets; all other donations should be described in the notes
B Contributions of services must be recognized in the financial statements of a nonprofit if the services received (1) create or enhance nonfinancial assets or (2) require specialized skills, are provided by individuals who possess those skills, and would typically need to be purchased if the services were not donated.
Nonprofit entities establish endowments when a donor contributes assets and makes certain specifications, including what? a. The types of securities in which the contributed assets must be invested b. How earnings and gains from investing those assets must be used. c. That the nonprofit's board of trustees should decide how to use the contributed assets d. That the nonprofit can keep the contributed assets until they become underwater
B Endowment donors generally specify how investment earnings and gains must be used.
A nonprofit entity receives a donation of 100 shares of securities listed on the American Stock Exchange. As a general rule, when it prepares its statement of financial position at year-end, the entity must report the securities at: a. Their fair value at time of donation b. Their fair value at date of the statement of financial position c. The lower of their fair value at date of donation or their fair value at date of the statement of financial position d. The lower of the cost to the donor or the fair value at date of the statement of financial position.
B For financial reporting purposes, FASB standards require that investments held by nonprofits in equity securities that have readily determinable fair values, and all investments in debt securities, be reported at fair value.
Matt Shaw buys 100 shares of common stock for $8,000 in January. The value of the stock fluctuates in a narrow range (averaging $8,700) throughout the year. In November, when it has a value of $9,500, he donates it to a nonprofit entity. On December 31, the stock has a fair value of $8,200. At what amount should the nonprofit entity value the stock on its December 31 statement of financial position? a. $8,000 b. $8,200 c. $8,700 d. $9,500
B Investments are recorded initially at their acquisition cost if purchased by the nonprofit and at fair value when donated, if received as a contribution. All investments in equity securities should be reported at fair value at the statement of financial position date.
The Trent Baisley Bird Watching Club charges membership dues to finance its activities. These dues are $300 per year but the only direct benefit to the club members is a monthly newsletter listing regional citings and bird-watching tips. The newsletter has a fair value of $85 per year. What portion of the $300 member dues should be reported as an exchange transaction and what portion should be reported as contribution revenue? a. The entire $300 should be reported as contribution revenue—support without donor restrictions b. $215 should be reported as contribution revenue—support without donor restrictions; the rest should be reported as magazine subscription revenue—an exchange transaction c. The entire $300 should be reported as an exchange transaction—membership dues d. The Club should report $215 as contribution revenue—support with donor restrictions; the rest should be reported as magazine subscription revenue—an exchange transaction
B Membership dues are a prime candidate for the need to bifurcate or break a contract into exchange and nonexchange components before measuring and recognizing revenue. Direct benefits to members are exchange transactions, as in the case of a purchase of services.
Under which of the following circumstances would a nonprofit's net assets be presented as net assets with donor restrictions? a. Donors impose stipulations on the use of resources that expire with the passage of time or that can be fulfilled by actions of the organization b. The entity's board of directors stipulates that resources must be held intact in perpetuity, but that the income from the gift may be used for any purpose desired by the organization's trustees c. The entity's board of directors requires that unrestricted resources be set aside for a specific purpose d. The bank lending money to the nonprofit requires a percentage of maximum debt service to be set aside in a sinking fund
B Only donor-imposed restrictions determine the category in which resources are classified and presented on the face of a nonprofit's financial statements
When a nonprofit entity's net assets are presented as net assets with donor restrictions, who has imposed the restrictions? a. The entity's board of trustees b. Donors c. The bondholders d. Government regulators
B Only donor-imposed restrictions determine the category in which resources are classified and presented on the face of a nonprofit's financial statements.
FASB revenue recognition requirements require nonprofits to apply five steps to each type of exchange contract to determine when to recognize revenue. The first 4 steps are (1) identify the contract with the customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, and (4) allocate the transaction price to the performance obligations in the contract. What is the 5th step? a. Recognize revenue when it is probable that the customer will pay for the goods or services b. Recognize revenue when (or as) the entity satisfies the related performance obligation c. Recognize revenue when the customer pays the bill d. Recognize revenue when the nonprofit prepares an invoice for the service
B The final step requires the nonprofit to recognize revenue when or as it satisfies a performance obligation, for example, by providing services. Revenue may be recognized at a point in time or over time. Point in time recognition would be used, for example, when the customer obtains control of the asset being sold. Over time recognition would be required, for example, if a nonprofit agreed to publish a monthly magazine for its members.
A nonprofit entity that conducts numerous programs receives investments as a donation. The donor, in a letter accompanying the donation, states that the principal of the donation must be maintained intact permanently, and that the income from the investment must be used to finance research in kidney disease. If the entity receives income of $8,000 from these investments, how should be income be reported? a. As an increase in net assets without donor restrictions b. As an increase in net assets with donor restrictions c. As an increase the initial contributed amount d. As an increase in any of the net asset classifications directed by the entity's trustees
B The income (such as interest, dividends, or rents) from investing contributions that are required to be maintained in perpetuity should be classified as donor restricted support if the donor has stipulated that investment income can only be used to perform specific research. Gains or net appreciation are not available for expenditure but must be added to the initial contributed amount.
The Victoria Fund, a child welfare fund, received $50,000 in cash in 2018. The donor requires the gift be held in perpetuity and that the income from investing this money may be used for its program of promoting adoption of young girls. How should the gift be reported in the Victoria Fund's financial statements? a. As cash and as contribution revenue—support without donor restrictions b. As cash and as contribution revenue—support with donor restrictions c. As a footnote only, until the time restriction is met d. As either a or b, provided the nonprofit does so consistently
B The restriction on this initial contribution can never be removed by action of the nonprofit and the contribution should be reported as support with donor restrictions.
The Chessie Fund received $100,000 in cash in 2018 with the stipulation that it be used to acquire a building that can be used to provide elderly housing. The Fund estimates that it will not have enough money to buy the building it has in mind until sometime in 2020. How should the gift be reported in the Fund's financial statements in 2018? a. As cash and as contribution revenue—support without donor restrictions b. As cash and as contribution revenue—support with donor restrictions c. As a footnote only, until a building that meets the donor's specifications can be purchased d. As cash and deferred revenue until a building that meets the donor's specifications can be purchased
B Time restrictions should be reported by a nonprofit as support with donor restrictions and will increase net assets with donor restrictions.
The FASB requires nonprofits to provide information about the availability of its financial assets to meet cash needs for general expenditures within one year of the statement of financial position date. What information is required to be presented or disclosed? a. The unused balances of all lines of credit available to the nonprofit b. The nonprofit's financial assets available within one year of the financial position date for general expenditure c. The amount of pledges receivable that the nonprofits expects will be available to pay for general expenditures of the current year d. The portion of long-term debt that is due to be paid in the current period
B the FASB requirement—unique to nonprofits—is to provide information about the availability of a nonprofit's financial assets at the statement date to meet cash needs for general expenditures within one year of the statement of financial position or balance sheet date.
The Board of Trustees of Building Lives, Inc., a nonprofit entity that provides support services for homeless men, votes to set aside $100,000 toward purchasing a fitness center for their clients at some time in the future. How should Building Lives report these assets? a. As board-designated funds, a component of net assets with donor restrictions b. As restricted assets c. As board-designated funds, a component of net assets without donor restrictions d. As noncurrent assets
C A board-designated fund is created when a nonprofit's governing body designates a portion of its net assets without donor restrictions to be used for a specified purpose.
A large portion of our study of nonprofits has focused on reporting contributions and donor-imposed restrictions on net assets. However, nonprofits also engage in "exchange transactions." Which of the following is the best description of an exchange transaction? a. A substantial payment made so that two seats in a newly constructed theatre would bear the donor's (patron's) name b. College tuition paid by local Better Business Bureau for a qualifying student c. College tuition paid by a student's parents who borrowed the money on a home equity loan d. A state grant to a college to cover operating expenses.
C As distinguished from contributions, an exchange is a transaction wherein each participant both receives and sacrifices value, as in the case of a purchase of services. When a donor makes a contribution, she expects services to be provided to those who the nonprofit serves, not to herself.
A nonprofit university uses fund accounting. The university's governing board decides to set aside $500,000 in a separate fund called the Student Performance Quasi-Endowment Fund, the income of which will be used to finance a long-term study on the career paths of the university's graduates. In which net asset classification of the university's statement of financial position would the net assets in this fund be reported? a. Net assets without donor restrictions b. Net assets with board designations c. Net assets without donor restrictions—board-designated for research d. Endowment funds
C Board-designated endowment funds are funds set aside by the governing board for lengthy but unspecified periods of time. Because they are not donor restricted, they are classified as net assets without donor restrictions for financial reporting purposes, often with an additional description as board-designated.
Steve Watson, a local certified public accountant (CPA), donates a significant amount of his spare time to Beth's Gallery, a nonprofit museum. He donates 50 hours to audit the books and 80 hours selling products at the museum store. He charges his regular clients $200 an hour as a CPA. How should the Gallery report Mr. Watson's donation of time? a. Report $26,000 (130 hours @ $200) as contribution revenue and expense b. Report $0 as contribution revenue and expense, and describe Mr. Watson's services to the museum in a note to the statements c. Report $10,000 (50 hours @ $200) as contribution revenue and expense; also, disclose in a note to the statements the fair value of selling services provided by Watson and others d. Report $10,000 (50 hours @ $200) plus the fair value of the selling services provided by Watson and others
C Contributions of services must be recognized in the financial statements of a nonprofit if the services received (1) create or enhance nonfinancial assets or (2) require specialized skills, are provided by individuals who possess those skills, and would typically need to be purchased if the services were not donated. In addition, when a nonprofit receives contributed services it must disclose the nature and extent of services received, programs or activities for which they were used, and the amount recognized as revenues. If practicable, the fair value of contributed services received but not recognized should also be disclosed.
The Bob Buckham Senior Center, a nonprofit entity, serves a hot meal to senior citizens every Friday evening. All the food is donated by a local supermarket. All the food preparation and serving is done by local volunteers. If the Center had to pay for the food, it would need to spend $10,000 a year. If it had to pay for the food preparation and service, it would need to spend $12,000 a year. How should it report these contributions in its financial statements? Food Food preparation and service a. Disclose in the notes Disclose in the notes b. Disclose in the notes Report $12,000 revenue and expense c. Report $10,000 revenue and expense Disclose in the notes d. Report $10,000 revenue and expense Report $12,000 revenue and expense
C Contributions of services must be recognized in the financial statements of a nonprofit if the services received (1) create or enhance nonfinancial assets or (2) require specialized skills, are provided by individuals who possess those skills, and would typically need to be purchased if the services were not donated. In addition, when a nonprofit receives contributed services it must disclose the nature and extent of services received, programs or activities for which they were used, and the amount recognized as revenues. If practicable, the fair value of contributed services received but not recognized should also be disclosed.
A donor had previously donated $2,000 to a nonprofit entity, stipulating that the gift must be used to finance the annual Fall Harvest festival. The festival is held and the gift is used for the stipulated purpose. Which of the following best describes the effect of the journal entries needed to record the expense resulting from use of the gift? a. An expense is reported in the net assets with donor restrictions column of the statement of activities. b. An expense is reported in the net assets without donor restrictions column of the statement of activities. c. A journal entry is made to reclassify $2,000 of net assets with donor restrictions to net assets without donor restrictions because the purpose for which the contribution was made has been fulfilled. An additional entry records the expense in the net assets without donor restrictions column of the statement of activities. d. The expense is netted against support with donor restrictions.
C GAAP requires that all expenses to be reported in the statement of activities as decreases in net assets without donor restrictions. To accomplish this result, the nonprofit needs to make a journal entry to record the expiration of the restriction, reclassifying net assets with donor restrictions to net assets without donor restrictions. Once this entry is made, the nonprofit should record the related expense with all other expenses in the net assets without donor restrictions column of the statement of activities.
In response to a fundraising campaign, an electric utility provides free electricity to a nonprofit entity. How should the nonprofit entity report this gift in its statement of activities? a. It should not be reported in the statement b. It should not be reported on the face of the statement, but should be disclosed in the notes c. It should be reported at its fair value as a revenue and as an expense d. The entity may choose either to not report it or to report it at fair value as a revenue and as an expense
C If a utility provides free electricity to a nonprofit, the nonprofit would recognize revenues without donor restrictions and expenses simultaneously equal to the fair value of the electricity used.
On March 1, 2018, a nonprofit organization received a donation of securities worth $4,500. When it prepared its financial statements at December 31, 2018, the securities had a fair value of $5,200. When it sold the securities on June 30, 2019, it received $4,600. The entity's accounting procedures call for reporting all unrealized and realized gains and losses in a single account. How should it record its gains and losses in 2018 and 2019? a. No change in 2018; a gain of $100 in 2019 b. A gain of $100 in 2018; no change in 2019 c. A gain of $700 in 2018; a loss of $600 in 2019 d. No change in 2018; a loss of $600 in 2019
C Nonprofits with equity securities that have readily determinable fair values, and investments in debt securities, must report them at fair value. Reporting investments at fair value means that the carrying amount of investments in the financial statements will usually need to be adjusted every year to the new fair value. It also requires simultaneous recognition, in the statement of activities, of any unrealized gains and losses caused by changes in fair value.
Which of the following is not a characteristic of a nonprofit, as defined by the Financial Accounting Standards Board (FASB)? a. Nonprofits receive significant contributions from resource providers who do not expect to receive benefits in return b. Nonprofits do not have defined ownership interests, such as stock that can be sold on a securities exchange c. Nonprofits can sometimes issue tax-exempt debt d. Nonprofits operated for a purpose other than to make a profit
C Only governmental entities may have the power to issue tax-exempt debt
Showing the amount and nature of donor-imposed restrictions on the statement of net assets helps financial statement users to assess a nonprofit organization's: a. Corporate responsibility b. Budgetary compliance c. Financial flexibility d. Liquidity
C Showing the amount and nature of donor-imposed restrictions in the statement of net assets helps the reader assess the nonprofit's financial flexibility.
Say No To Meth, a nonprofit entity devoted to informing the public about the hazards of methamphetamine, sends out brochures to a large number of doctors, urging that the brochures be placed in the doctors' waiting rooms. The four-page brochure contains a description of the addictive and destructive nature of the drug, but half of the last page contains an appeal for funds, in relatively large type. How should the entity report the $30,000 expense of preparing, printing, and distributing the brochure in its statement of activities? a. The entire $30,000 must be reported as a fundraising expense b. The entire $30,000 must be reported as a program expense c. The $30,000 should be allocated between fundraising and program expenses, using appropriate cost accounting techniques d. The $30,000 should be reported under the caption "Program and fundraising expenses"
C The appropriate accounting for the costs depends on three factors or criteria—the brochure's purpose, the audience it is intended to reach, and its contents. If all three criteria are met, the joint costs should be allocated between the fundraising and program functions.
A nonprofit organization receives $3,400,000 of pledges in its annual telethon, all of which may be used for any of the services the nonprofit provides. When should the organization recognize contribution revenue? a. When cash is received b. When the pledges are received c. When the pledges are received, less an appropriate allowance for uncollectible pledges d. When the pledges are received, provided the entity classifies the pledges as contribution revenue without donor restrictions
C Unconditional promises to give should be recognized in the financial statements as receivables and as revenues or gains when the promises are received.
Ruth Richter gives a nonprofit entity $25,000 in cash. She tells the entity that it may use the gift for a particular research project but only after it receives at least $20,000 cash from other donors to help complete the project. If the entity fails to raise the additional $20,000, it must return Ruth's gift. What account should the entity credit when it receives Ruth's gift but none of her conditions are substantially met? a. As contribution revenue—support without donor restrictions b. As contribution revenue—support with donor restrictions c. Refundable advance (deferred revenue) d. Allowance for uncollectible contributions
C When a donor actually transfers assets to a nonprofit simultaneously with a conditional promise, the nonprofit should not recognize revenues. Instead, the receipt of the assets should be accounted for as a refundable advance (deferred revenue) until the conditions set by the donor are substantially met.
Dave Hall did some estate planning recently and decided to establish a trust for his favorite museum, the National Baseball Hall of Fame. He put $6 million into a revocable charitable remainder trust whereby all income from the trust would go to his children until the youngest reaches age 35. At that time, the remaining trust assets would be contributed to the Hall of Fame. An actuary for the trust estimated, based on the current ages of Hall's children, that $3.2 million could be contributed to the Hall of Fame. How should the Hall of Fame report this arrangement when it learns of the trust? a. It should record nothing now. It should record the fair value of the assets only when it receives them. b. It should record $3.2 million as contributions receivable and as contribution revenue with restrictions c. It should disclose the anticipated $3.2 million contribution in the notes to its financial statements d. It should record $3.2 million as contributions receivable and as a refundable advance
D A revocable split-interest agreement is simply an intention to give. Any contributions received while the agreement is still revocable should be reported as assets and as a refundable advance.
Donor restrictions play an important role in how assets should be classified in a nonprofit's statement of financial position. What additional information may a nonprofit provide about the liquidity of its assets and liabilities? a. Classifying assets as current and noncurrent in the same way that companies do b. Sequencing assets based on their nearness to cash and liabilities based on their nearness to use of cash c. Disclosing information about liquidity, maturity, and restrictions on use in the notes to financial statements d. All of the above
D Additional information about liquidity of assets and liabilities is presented in any of the following ways: i. Sequencing assets based on their nearness to cash conversion and liabilities based on their nearness to redemption (and use of cash) ii. Classifying assets as current and noncurrent in the same manner used for commercial enterprises iii. Disclosing any additional information about liquidity or maturity of assets and liabilities or restrictions on asset use.
GAAP require nonprofits to report their expenses by nature and function in one location. What may nonprofits use as "one location"? a. A schedule in the notes to the financial statements b. The face of their statement of activities c. A separate financial statement called a statement of functional expenses d. All of the above
D All nonprofits are required to report expenses by nature and function in one location; that is, on the face of the statement of activities, as a schedule in the notes to the statements, or in a separate financial statement.
Which of the following is true regarding the Financial Accounting Standards Board requirements for a nonprofit entity's accounting and financial reporting? a. Both fund accounting and reporting by net asset classification are required b. Neither fund accounting nor reporting by net asset classification are required c. Fund accounting is required, but reporting by net asset classification is not required d. Fund accounting is not permitted, but reporting by net asset classification is required
D Although fund accounting is not permitted for GAAP financial reporting purposes, the FASB does not preclude providing disaggregated information by fund groups within the two required net asset classes—with donor restrictions and without donor restrictions.
A nonprofit organization enters into an agreement with a local bank to provide it with a letter of credit for a building project. The bank requires the organization to put aside 10% of pledges collected for the building project in a separate account as a good faith deposit for the line of credit. At year-end, the organization has $255,000 in this separate account. How should the $255,000 of net assets be classified? a. As net assets with donor restrictions b. As net assets without donor restrictions—board designated c. As net assets available for spending d. As net assets without donor restrictions because the restriction is from a creditor relationship
D Although some information about contractual limitations is required on the face of the statement of financial position, most information about restrictions arising from non-donor contracts and bond agreements is presented in the notes to the financial statements.
A nonprofit museum owns a building and a large collection of art works. Both the building and the art works are capitalized on the entity's statement of financial position. What is the general rule regarding depreciation of the building and the art works? a. The building must be depreciated, but the art works cannot be depreciated b. Both the building and the art works must be depreciated c. Neither the building nor the art works can be depreciated d. The building must be depreciated, but depreciation need not be recognized on works of art if their estimated useful lives are estimated to be extraordinarily long
D As a general rule, nonprofits must allocate the cost of their long-lived tangible assets, whether acquired in exchange transactions or through donation, over the estimated lives of the assets. Nonprofits that choose to capitalize works of art, historical treasures, and collections are not required to depreciate those assets if their economic benefit or service potential is used up so slowly that their estimated useful lives are extraordinarily long.
A nonprofit organization receives a pledge from a donor in fiscal 2018. The terms of the pledge are such that the organization will receive a large cash contribution in fiscal 2022. At what value should the pledge be reported in the organization's 2018 statement of financial position? a. Fair value b. Compound value c. Marginal value d. Discounted present value
D Consistent with the requirement for measuring donations at fair value, the FASB requires that promises to give cash in the future (that is, more than 1 year after the statement of net position date) be discounted to present value.
A nonprofit university uses fund accounting for internal purposes. It maintains a Plant Fund to account financial resources to be used for capital asset acquisitions as well as land, building, and equipment it uses in its operations. In its external financial reporting, how should the university classify the net assets that it reports in its Plant Fund? a. All net assets should be classified as net assets without donor restrictions b. All net assets should be classified as net assets with donor restrictions c. All net assets should be classified as net assets held for capital purposes d. Net assets arising from resources set aside by the governing board should be classified as net assets without donor restrictions; net assets arising from contributions restricted to capital asset acquisitions should be classified as net assets with donor restrictions
D Depending on the nature of restrictions on resources reported in Plant Funds, net assets in these funds will need to be separated between those with donor restrictions and those without for financial reporting purposes.
A nonprofit entity conducts a special fundraising campaign at the end of fiscal year 2018, and specifies that it will use the money for its 2019 general operations. It receives pledges totaling $200,000. Based on past experience, the entity expects to receive $150,000 in cash. How should the entity report these events? a. Recognize the entire amount pledged as contribution revenue—support without donor restrictions in 2018 b. Recognize the amount pledged (net of a $50,000 allowance for estimated uncollectibles) as contribution revenue—support without donor restrictions in 2018 c. Recognize the amount pledged (net of a $50,000 allowance for estimated uncollectibles) as contribution revenue—support without donor restrictions in 2018; and report the 2019 expenses as changes in support with donor restrictions in 2019 d. Recognize the amount pledged (net of a $50,000 allowance for estimated uncollectibles) as contribution revenue—support with donor restrictions in 2018; and reclassify the net assets as unrestricted at the beginning of 2019
D In this case, the special fundraising event establishes the time restriction. However, the accounting treatment of conditions differs from that regarding restrictions. A time restriction is not a condition because the only thing that must happen is the passage of time. A time restriction causes the contribution to be classified as support with donor restrictions. The nonprofit reclassifies these net assets when the time restriction expires at the beginning of 2019.
A nonprofit museum holds a valuable collection of art works. On reviewing the museum's financial statements, a new trustee notices that the statement of financial position contains no line item for inventory of art works. He is told by the accountant that the museum has never taken an inventory because "it would cost too much." What are the accounting requirements regarding capitalization of the art works? a. All collections of art works must be capitalized, regardless of the circumstances b. Collections of art works are not required to be capitalized under any circumstances c. If collections of art works meet certain criteria (such as being protected and preserved), they must be capitalized d. If collections of art works meet certain criteria (such as being protected and preserved), the museum has an option either to capitalize or not capitalize them
D Nonprofits have the option of not reporting donated works of art, historical artifacts, rare books, and similar assets as revenues or gains and assets, provided the donated items are added to collections and the collections meet all three criteria established by GAAP.
At the statement of financial position date, a nonprofit has an investment in equity securities, the fair value of which is greater than the amount at which the investment was initially recorded. What adjustment, if any, is needed? a. No adjustment is needed. b. The increase should be recorded as a gain in net assets without donor restrictions. c. The increase should be recorded as a gain in net assets with donor restrictions. d. The increase should be recorded as an unrealized gain in the same net asset class in which the investment is reported.
D Nonprofits with equity securities that have readily determinable fair values, and investments in debt securities, must report them at fair value. Reporting investments at fair value means that the carrying amount of investments in the financial statements will usually need to be adjusted every year to the new fair value. It also requires simultaneous recognition, in the statement of activities, of any unrealized gains and losses caused by changes in fair value.
Which of the following organizations establish accounting and financial reporting requirements for nonprofit entities? a. The Federal Accounting Standards Advisory Board b. The Governmental Accounting Standards Board c. The American Institute of CPAs d. The Financial Accounting Standards Board
D The Financial Accounting Standards Board's Accounting Standards Codification is the single source of authoritative accounting for nonprofit entities.
The Sutton Hoo Foundation holds $32,000,000 fair value in debt and equity securities as a result of a permanently restricted contribution it received in a previous year. During 2018, the Foundation has a net gain of $2 million and $880,000 of interest and dividend income on those investments. If the donor specified that investment income from the contribution should be used support historical research for the years 300-1100 AD, how should the Foundation, whose focus is on European history from 100 to 1800 AD, classify this income? a. It should report investment income—support with donor restrictions. b. It should report investment income—support without donor restrictions c. It should add the investment income to the investments in restricted contribution. d. It should report both the gain and the investment income as support with donor restrictions.
D The gain and the investment income should be reported in the statement of activities as increases in net assets with donor restrictions, because use of both is limited by donor-imposed restrictions.
The Geneva Fund received $50,000 in cash in 2018. The donor requires the gift be used in 2018. How should the gift be reported in the Geneva Fund's 2018 financial statements? a. As cash and as contribution revenue—support without donor restrictions b. As cash and as contribution revenue—support with donor restrictions c. As a footnote only, until the time restriction is met d. As either a or b, provided the nonprofit does so consistently
D Time restrictions should be reported by a nonprofit as support with donor restrictions. As an option, if the nonprofit receives donor-restricted contributions whose restrictions are met in the same reporting period the contributions are received, the contribution may be reported as support without donor restrictions, provided the nonprofit reports similar types of contributions that way consistently from one period to another.
