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Chapter 13 Accounting for Not-for-Profit Organizations     True / False Questions   1

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Chapter 13

Accounting for Not-for-Profit Organizations

 

 

True / False Questions

 

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

 

True    False

 

2.         A voluntary health and welfare organization (VHWO) is a type of not-for-profit that depends primarily on charges for services as a source of revenue, rather than on contributions from the public at large. 

 

True    False

 

3.         The FASB generally requires that not-for-profit organizations record unconditional pledges as support (contributions) only when received in cash. 

 

True    False

 

4.         Cash received by a nongovernmental not-for-profit in year 1 that the donor stipulates is to cover operating expenses of the following year should be recognized as an "increase in temporarily restricted net assets" in year 1 and as "net assets released from restrictions" in year 2.

 

True    False

 

5.         The FASB states that donated services should be recorded as contributions by a not-for-profit organization if material, and if they meet the recognition criteria. 

 

True    False

 

6.         The FASB requires that support from special events, if related to the central ongoing and major activities of the organization, and related direct costs, be reported at their gross amounts in the statement of activities. 

 

True    False

 

7.         GAAP for nongovernmental, not-for-profit organizations is set by the FASB and the AICPA. 

 

True    False

 

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

 

True    False

 

9.         Contributions received in a prior period and restricted by the donor for construction of a building were reported as increases to "temporarily restricted net assets" in the period received. When the building is constructed in a subsequent period a not-for-profit would report "contributions" for the amount released from restrictions.

 

True    False

 

10.       Under FASB standards the statement of activities for a not-for-profit organization is required to be separated into operating and nonoperating activity.

 

 

True    False

 

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

 

True    False

 

12.       The FASB requires not-for-profits to prepare a statement of cash flows. 

 

True    False

 

13.       Similarity in the characteristics of nongovernmental not-for-profit (NFP) organizations and governmental NFP organizations can make it difficult to determine whether the NFP is nongovernmental or governmental in nature. 

 

True    False

 

14.       The FASB requires a statement of functional expenses be prepared by all not-for-profit organizations. 

 

True    False

 

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

 

True    False

 

16.       According to the FASB Codification, donated materials are generally not recognized as contributions by a not-for-profit organization. 

 

True    False

 

17.       Donor-imposed restrictions must be clearly reflected in financial statements of not-for-profit organizations reporting under the FASB. 

 

True    False

 

18.       The FASB requires that investments initially be recorded by a not-for-profit organization at cost, or in the case of donated investments at fair value as of the date of the donation.

 

True    False

 

19.       Museums and religious organizations reporting in accordance with FASB must capitalize and report assets such as works of art, historical treasures, and similar collectible items if they are held for public inspection.

 

True    False

 

 20.      Under FASB standards, expenses of a not-for-profit organization can only be shown as reductions of unrestricted net assets.

 

True    False

 

21.       The FASB requires the statement of financial position prepared by a not-for-profit organization to report net assets in these categories: unrestricted, temporarily restricted, net investment in capital assets, and permanently restricted. 

 

True    False

 

22        To be considered a nongovernmental not-for-profit an organization must be tax-exempt.

 

True    False

 

23.       According to the information provided in the textbook, Beta Alpha Psi would be considered an other nonprofit organization (ONPO).

 

True    False

 

24.       One characteristic that separates a governmental not-for-profit from a nongovernmental not-for-profit is the ability to raise taxes.

 

True    False

 

25.       Under the FASB Codification a $5 million endowment that cannot be spent for 50 years should be classified as permanently restricted net assets.

 

True    False

 

26.       Term endowments and quasi-endowments are classified as temporarily restricted net assets according to the FASB.

 

True    False

 

27.       Similar to the GASB, the FASB requires not-for-profit entities to prepare the statement of cash flows using the direct method.

 

True    False

 

28.       The FASB requires that long-term unconditional pledges (those that will not be collected within a year) be reported at fair value.

 

True    False

 

29.       The FASB requires that if a financial intermediary has variance power it recognize a donation as a contribution payable on its financial statements.

 

True    False

 

30.       Under the FASB Codification the costs incurred for a joint activity may be allocated between fund-raising expenses and program expenses if the criteria of purpose, audience, and content are met.

 

True    False

 

31.       The FASB states that if a not-for-profit has a controlling interest in another not-for-profit it should consolidate the not-for-profit over which it has a controlling interest into its financial statements.

 

True    False

 

 

Multiple Choice Questions

 

32.       Which of the following characteristics of not-for-profit organizations (NFPs) can be used to distinguish a nongovernmental from a governmental NFP?

 

A.        Contributions by resource providers who do not expect a return on investment.

B.        Ability to impose taxes on citizens.

C.        Absence of ownership interests.

D.        All of the above characteristics are generally different for nongovernmental versus governmental NFPs.

 

 

33.       Responsibility for establishing generally accepted accounting principles (GAAP) for nongovernmental, not-for-profit organizations rests with the FASB and was most clearly established: 

 

A.        By the FASB Codification.

B.        When the FASB was created in 1974.

C.        When the GASB was created in 1984.

D.        In the AICPA's Statement of Auditing Standards No. 69 (hierarchy of GAAP).

 

 

34.       Under FASB standards how would a not-for-profit organization recognize a conditional pledge?  

 

A.        It would debit Pledges Receivable and credit Contributions—Temporarily Restricted.

B.        It would debit Pledges Receivable and credit Deferred Contributions.

C.        It would debit Conditional Pledges Receivable and Credit Deferred Contributions.

D.        It would not recognize the conditional pledge until pledge conditions are substantially met.

 

 

35.       The FASB Codification requires the following financial statements for all not-for-profit organizations: 

 

A.        Statement of financial position, statement of activities, statement of cash flows, and statement of functional expenses.

B.        Statement of financial position, statement of operations, statement of cash flows, and statement of functional expenses.

C.        Statement of financial position, statement of activities, and statement of cash flows.

D.        Statement of financial position, statement of revenues and expenses, statement of cash flows, and statement of functional expenses.

 

 

36.       Which of the following statements is true regarding fund accounting for not-for-profit organizations (NFPs)? 

 

A.        Fund accounting can be used by NFPs for external purposes, but not internal purposes.

B.        Fund accounting can provide a good mechanism for facilitating reporting to donors.

C.        Fund accounting is not allowed.

D.        Fund accounting for internal and external reporting purposes has been replaced by FASB with the three classes of net assets (unrestricted, temporarily restricted, and permanently restricted).

 

 

37.       According to the FASB Codification, which of the following is a condition that must be met for contributed services to a not-for-profit organization (NFP) to be recorded as both a contribution and as an expense? 

 

A.        The service creates or enhances nonfinancial assets, such as a carpenter renovating a building.

B.        The service requires a specialized skill and is provided by someone who possesses the specialized skill, such as a lawyer preparing contracts.

C.        The service supplements the management function, such as an auditor preparing a program audit, which is not normally done.

D.        All of the above must be met for contributed services to be recognized as a contribution and an expense.

 

 

38.       The FASB requires that investments in equity securities that have a readily determinable market value and all debt securities of a not-for-profit organization be reported at: 

 

A.        Lower of cost or market.

B.        Amortized cost.

C.        Fair value.

D.        Cost.

 

 

39.       An example of an increase in net assets for a not-for-profit organization that would be labeled revenue rather than support is:

 

A.        An unconditional promise to give.

B.        Investment income.

C.        A restricted gift.

D.        An allocation of funds from the local United Way organization.

 

 

40.       A donor provides a large cash contribution that is to be used for acquisition of a new building. Under FASB standards, how would this contribution be reported by a not-for-profit organization on its statement of cash flows? 

 

A.        Operating activity.

B.        Investing activity.

C.        Financing activity.

D.        Capital and related financing activity.

 

 

41.       The FASB states that depreciation expense in a not-for-profit organization should be: 

 

A.        Assigned to or allocated to the functions to which it relates.

B.        Reported under the management and general function.

C.        Disclosed in the notes to the financial statements.

D.        Allocated to program but not support functions.

 

 

42.       A not-for-profit (NFP) organization acting as a financial intermediary receives a contribution. Under the FASB Codification the NFP would be most likely to recognize the contribution as a liability under which of the following situations? 

 

A.        The NFP has variance power.

B.        The NFP is acting as an agent, receiving the contribution on behalf of another organization.

C.        The NFP is financially interrelated with the organization on whose behalf it received the contribution.

D.        The NFP has a 51 percent interest in the organization on whose behalf it received the contribution.

 

 

43.       According to the FASB, temporarily restricted net assets are released from restrictions: 

 

A.        At the end of each fiscal year.

B.        As assets are spent for the purposes intended by the donor.

C.        When funds are returned to the donor.

D.        When they are converted to permanently restricted net assets.

 

 

44.       A local philanthropist made an unconditional pledge to donate $100,000 to a not-for-profit organization to be paid in five equal installments of $20,000 beginning in two years. Under FASB standards the pledge would be recognized as:

 

A.        A contribution of $20,000 in each of the five years a contribution is made.

B.        A contribution of $100,000 in the year the pledge is made, adjusted for the estimated uncollectible amount.

C.        Deferred support of $100,000 in the year the pledge was made.

D.        A contribution of $100,000 in the year the pledge was made, discounted for the difference between the pledge and its present value.

 

 

45.       Which of the following statements is correct regarding reporting of special events and related direct costs under current FASB standards? 

 

A.        Special events and related direct costs must be reported separately at their gross amounts if they relate to the ongoing major operations of a not-for-profit.

B.        Special events revenues are to be reported at gross amounts, even if direct costs are of a peripheral or incidental nature.

C.        With few exceptions special events revenues are reported net of related direct costs.

D.        Expenses of promoting and conducting special events should be netted directly against special events revenue.

 

 

46.       A not-for-profit organization incurred $10,000 in management and general expenses in the current fiscal year. In the organization's statement of activities prepared in conformity with FASB standards, the $10,000 would be reported as: 

 

A.        A deduction from program revenue.

B.        Fund-raising expense.

C.        Program services expenses.

D.        Supporting services expenses.

 

 

47.       Which of the following would be considered "contribution revenue or support" of a not-for-profit organization reporting under FASB standards? 

 

A.        Gain on disposal of capital assets.

B.        Money received from a fund-raising campaign.

C.        Money received from rental of surplus office space.

D.        Investment earnings.

 

 

48.       In accordance with FASB standards, securities donated to a not-for-profit organization should be recorded at the: 

 

A.        Donor's recorded amount.

B.        Fair market value at the date of the gift, or the donor's recorded amount, whichever is lower.

C.        Fair market value at the date of the gift, or the donor's recorded amount, whichever is higher.

D.        Fair market value at the date of the gift.

 

 

49.       Which of the following would be reported as an Asset with Restrictions on Use? 

 

A.        A cash contribution for a program activity, such as diabetes research.

B.        A cash contribution for a new building.

C.        Cash restricted by debt covenants with lenders.

D.        Cash restricted by the board for purchase of new computer equipment.

 

 

50.       Under FASB standards, which of the following contributions would not have to be reported as an asset on the statement of financial position of a not-for-profit organization? 

 

A.        Land was donated to the Friends of the Forest Society for conversion into a nature trail.

B.        The original courthouse was donated to the Historical Preservation Society for conversion into a museum.

C.        An art collector donated a famous oil painting to a local art museum for display in its exhibit hall.

D.        A valuable coin collection was donated to the Youth for Conservation organization, which the organization plans to sell at current market prices.

 

 

51.       According to the FASB, a voluntary health and welfare organization would report the account Provision for Uncollectible Pledges as which of the following? 

 

A.        Expense.

B.        Contra revenue.

C.        Contra asset.

D.        FASB allows management to determine its policy for reporting the Provision for Uncollectible Pledges.

 

 

52.       A not-for-profit organization that follows FASB standards would display changes in all classes of net assets on which of the following statements? 

 

A.        Statement of activities.

B.        Statement of financial position.

C.        Statement of cash flows.

D.        Statement of functional expenses.

 

 

53.       When a nongovernmental not-for-profit organization spends money for the purpose for which an external donor intended, then the expense is reported as a: 

 

A.        Decrease in temporarily restricted net assets.

B.        Decrease in unrestricted net assets.

C.        Decrease in permanently restricted net assets.

D.        Decrease in current-restricted fund balance.

 

 

54.       The purpose of a statement of functional expenses is to: 

 

A.        Report on the net income of each program and the related direct and indirect expenses.

B.        Report on program expenses and supporting expenses.

C.        Report on the natural expenses (object-of-expense), as well as program and support functions expenses.

D.        Report on the cash flows of each program and that of supporting the programs.

 

 

55.       According to the FASB, how should unrealized gains on the investment portfolio of a not-for-profit organization be recognized? 

 

A.        Not recognized.

B.        Reported in the net asset section of the balance sheet.

C.        Reported according to whether the gains relate to trading, available-for-sale, or held-to-maturity assets.

D.        Reported on the statement of activities.

 

 

56.       Which of the following is not one of the criteria specified in the FASB Codification for determining whether joint costs with a fund-raising appeal can be reported with program expenses rather than as fund-raising expenses?

 

A.        Purpose.

B.        Audience.

C.        Time period.

D.        Content.

 

 

57.       Which of the following terms is used to indicate that a donor provided a gift with explicit instructions that the gift is to be used for a specific purpose by the not-for-profit but the entire amount may be spent right away? 

 

A.        Board-designated net assets.

B.        Permanently restricted net assets.

C.        Endowment assets.

D.        Temporarily restricted net assets.

 

 

58.       In the current year, the not-for-profit organization Save the Butterflies Foundation received cash of $500 to be used as the Foundation wishes and $1,000 to be used for butterfly research. Save the Butterflies also received pledges of $700 that it can use as it wishes and $600 for its building fund. All pledges are expected to be received next year. How much would Save the Butterflies report as temporarily restricted contributions in the current year?

 

A.        $1,000.

B.        $1,600.

C.        $1,300.

D.        $2,300.

 

 

59.       In the current year, the not-for-profit organization (NFP) How to Read Government Financial Reports received both cash of $1,000 and pledges of $2,000 to be used for teaching citizens how to read government financial reports. During the year the organization spent $1,500 teaching citizens to read financial statements. Assuming the NFP has a policy of spending its restricted resources first, in the current year what amount of contributions can be reclassified as unrestricted? 

 

A.        $1,000.

B.        $1,500.

C.        $2,000.

D.        $3,000.

 

60.       The mission of the not-for-profit organization, Save Our Butterflies Foundation, is to provide research and education concerning the conservation of butterflies.  Which of the following expenses would be reported as a support expense by the Foundation?

 

A.        The costs of exhibiting at the local Nature Conservancy annual fair held for the general public.

B.        The costs of depreciation on it butterfly facility.

C.        The cost of printed materials distributed to the local elementary schools on how to start butterfly gardens.

D.        The cost of printing and distributing its annual report.

 

 

61.       For financial reasons, two not-for-profit hospice organizations (hospices A and B) decided to combine.  As a result of the combination, the assets and liabilities of the combined hospice were reported at the amounts that had been previously reported by A and B on their financial statements. Under the FASB, the combining of hospices A and B would be classified as which of the following?

 

A.        Merger.

B.        Consolidation.

C.        Acquisition.

D.        Component unit.

 

 

62.       During the year a donor pledged $1,000,000 in funds to a not-for-profit private charter school.  The school will receive the pledge if it is able to raise $500,000 in funds over the next year.  According to the FASB, how would this pledge be recorded?

           

A.        Contribution—Unrestricted.

B.        Contribution—Temporarily Restricted.

C.        Contribution—Permanently Restricted.

D.        It would not be recorded.

 

 

63.       A local CPA volunteered his time to help install and test new computer accounting system software for an after-school development organization that serves disadvantaged children.  If the services had not been donated the organization would have had to hire a consultant to install the system. In accordance with the FASB Codification, the value of the CPA’s time devoted to helping the organization should be recorded as:

 

A.        Contribution—Temporarily Restricted.

B.        Program Expense.

C.        Machinery & Equipment.

D.        It would not be recorded.

 

 

64.       The board of directors for a voluntary health and welfare organization decided to designate $20,000 each year for the next three years to fund a special research project it was planning to conduct at the end of the three year period.  How would these board-designated resources be reported on the statement of financial position?

 

A.        Unrestricted net assets.

B.        Temporarily restricted net assets.

C.        Permanently restricted net assets.

D.        Internal payable.

 

 

65.       How does the FASB require not-for-profit organizations to report expenses?

 

A.        Natural classification, such as salaries, rent, and supplies.

B.        Functional classification, such as program and support.

C.        Management has the option of reporting using natural classification or functional classification.

D.        Both natural classification and functional classification must be reported, one must be recognized on the face of the financial statements and one is reported in the notes to the financial statements.

 

 

66.       In accordance with the FASB Codification, which of the following would not be classified as a support expense by the not-for-profit organization Save Our Lakes?

 

A.        The cost of printing and distributing the annual report.

B.        The cost of a mailing to past contributors requesting donations for lakeshore cleanup.

C.        The cost of the annual lakeshore cleanup activities.

D.        The cost to have an attorney review the organization’s by-laws.

 

 

 

Short Answer Questions

 

67.       The following are key terms in Chapter 13 that relate to accounting for not-for-profit organizations:

 A. Nonexchange transactions

 B. Temporarily restricted net assets

 C. Collections

 D. Variance power

 E. Exchange transactions

 F. Board-designated net assets

 G. Permanently restricted net assets

 H. Promise to give

 

 For each of the following definitions, indicate the key term from the list above that best matches by placing the appropriate letter in the blank space next to the definition.

 

    

 

 

 

 

 

68.       For each of the following unrelated transactions, record the journal entry that would be made by a nongovernmental, not-for-profit organization involved in medical research. If no journal entry is recorded, explain why there is no journal entry.

1. The entity received $1,500 in cash contributions. Of that amount, $1,000 is to be used for medical research.

2. The entity received pledges of $700,000 for its endowment fund. All pledges will be collected next year.

3. The entity received donated services of $1,200 from medical researchers who helped with the entity’s on-going drug development research. It also received $300 in donated services from students, who helped clean the research facilities.

4. The entity paid medical research operating expenses of $5,000 that were related to restricted net assets it had received in prior years.

 

 

69        The not-for-profit organization Accountants Rule has a mission to promote the accounting profession in the local community.  It is heavily supported by local accounting firms and businesses seeking to increase the number of individuals entering the profession.  Following is the pre-closing trial balance for the organization.  In good form, prepare a statement of activities for the organization for the year ended December 31, 2017.

 

 

                                                                                                                                      Debit                     Credit

        Cash and cash equivalents                                                                         $     985

        Investments                                                                                                   $  2,605

        Pledges receivable                                                                                         $     830

        Allowance for uncollectible pledges                                                                                           $       35

        Accounts payable and accrued liabilities                                                                                 $  1,090

        Unrestricted net assets                                                                                                                 $  1,267

        Temporarily restricted net assets                                                                                               $  2,148

        Contributions—unrestricted                                                                                                       $  3,460

        Contributions—temporarily restricted                                                                                      $  1,720

        Interest income--unrestricted                                                                                                      $       55

        Net assets released—satisfaction of program restriction—

          unrestricted                                                                                                                                  $  1,850

        Net assets released—satisfaction of program restriction—

          temporarily restricted                                                                                 $  1,850

        Outreach expenses                                                                                       $  2,800

        College recruitment expenses                                                                     $  1,955

        Management and general expenses                                                          $     425

Fund-raising expenses                                                                                  $     175                               

        Total                                                                                                               $11,625                 $11,625

 

 

Essay Questions

 

70.       Explain the purpose of FASB ASC 958-720-45 on joint-cost accounting as it relates to reporting fund-raising and program expenses of a not-for-profit organization. How is this standard applied? 

 

 

71.       Distinguish not-for-profit organizations from entities in the government and commercial sectors of the U.S. economy.

 

 

72.       Distinguish between "support" and "revenues from exchange transactions."

 

 

73.       If the program services expenses category includes both directly related costs and indirect costs allocated to it, why is it necessary to have a separate category of "supporting services expenses"?

 

 

74.       Would a not-for-profit library that receives the majority of its resources from a specific tax levy on local citizens remitted to the city follow the same financial reporting principles as would a library that operates without a dedicated tax and instead relies on contributions from individuals and grants from foundations and governments? Explain.

 

 

75.       Explain when donated materials should be recognized as a contribution and as an expense by a nongovernmental not-for-profit organization.

 

 

76.       Explain the accounting for contributions received by a financial intermediary under the FASB Codification.