uWorld CPA - FAR - Ch.2 - General purpose accounting (for nongovernmental not-for-profit entities)

If an individual donates $1m as a conditional donation, how should the receiving entity record it?

As a refundable advance (unearned revenue / liability acount and cash)
when earned, it's removed from liability and booked as revenue.

What is an endowment?

Fund donated to not for profits with restriction to invest the principal amount, but investment income can be used for general operations or services.

Are pledges to donate considered revenue without donor restrictions or revenues with donor restrictions?

revenue with donor restriction. The restriction is time based.

Which entities must report using accrual basis under GAAP?

For profit and private Non-for-profit nongovernmental entities

Which entities must report using cash / modified basis under GAAP?

Special purpose frameworks

Which entities must report using modified accrual basis under GAAP?

governmental funds

Do private not-for-profit hospitals report financials using a statement of financial position with net assets with / without donor restrictions separate?

Yes.

Do public universities report financials using a statement of financial position with net assets with / without donor restrictions separate?

No, it follows guidance promulgated by GASB which has different rules.

What is the appropriate characterization of net assets of nongovernmental not-for-profit organizations?

Residual interest, the monetary amount that remains after subtracting all liabilities from assets.

Are donor contributions reported on the statement of operations?

No. The increase is reported on statement of changes in net assets.

What are the four sections on the statement of activities?

Revenues, gains and other support

Net assets released from restrictions

Expenses and losses

Changes in net assets (reconciliation of beginning and ending net assets)

True or false: Expenses on the statement of activities are reported only in the 'without donor restrictions' column.

True. All expenses are reported as decreases in net assets without donor restrictions. Thus, expenses are deducted ONLY from revenues without donor restrictions.

What are the two distinguishing factors to report expenses by on the expenses and losses report on the statement of activities?

By nature (e.g. salaries, rent)

By function (program cost, support services - e.g. management, fundraising, membership development)

What's a statement of functional expenses and how is it presented?

Detailed schedule of expenses by function, broken down into natural expense categories (e.g. rent, utilities)

May be presented on face of statement of activities, or separate statement, or as note to financials.

What's the two categories of functional expenses on the statement of functional expenses?

Program activities: Furthers the mission.

Supporting activities: Secondary to mission. (management and general admin expenses etc)

True/false. Depreciation should be reported on statement of activities as decrease in net assets without donor restriction

True

On the statement of cash flows for not-for-profit entities, which activities section would contributions restricted for long term purpose be reported on?

Financing activities

On the statement of cash flows for not-for-profit entities, which activities section would unrestricted contributions and contributions restricted to temporary restrictions be reported on?

Operating activities

Operating activities for not-for-profit: most items

Inflows: Unrestricted contributions, revenue from exchanges, revenue restricted for operating purposes

Outflows: Expenses paid, grants to other organizations

Investing activities for not-for-profit: regards assets

Inflow: Proceed from sale of assets (e.g. work of art)

Outflow: Payments for asset purchases

Financing activities for not-for-profit: regard debt and donor restricted contributions

Inflow: Proceeds from LT donor restrictions (e.g. contribution restricted for the construction of a new building), proceeds from loans, proceeds from dividends

Outflow: Principal payments on loans or other LT debt,

In the indirect method, the operating activities section of cash flow statement for a not-for-profit begins with...

total changes in net assets.

(not net income like for profits)

What is Other revenues and gains?

Amounts receieved for reasons beside primary mission

Currently available without restrictions to be used at discretion of entity.

How would spending money from donor restricted funds be reported on statement of activities?

Decrease in net assets with donor restrictions

Increase in net assets without donor restrictions

Donor restricted funds must be reclassed first.

True/false. Are quasi-endowments considered restricted?

False.

Quasi endowments are enacted by the not for profit's internal board, and do not qualify. Only external donations qualify as restricted.

True/false. A notice from an individual that has a not-for-profit named as a beneficiary in the individual's may be considered contribution revenue.

False.

Intent to bequeath money is a conditional pledge. Also the will can be changed by the individual at any time. It's not recognized until the condition is satisfied (e.g. individual dies) or individual's estate goes through the probate process.

Special rule for art / artifact / antique donations

Permitted to EXCLUDE the donation from face of financials if all of the following are met:

NPO intends to use the donated item for display/research only

The organization cares for it themselves AND

if sold, the proceeds are either reinvested in other collectables or used in the direct care of existing collections.



If none apply, record
DR Asset art
CR Contribution revenue without restrictions

What's the difference between

Net assets with donor restrictions, and..

Net assets with donor conditions?

Donor restrictions: resources that will have limitation on their use. (Time, purpose, use)

Donor conditions: Recipient must overcome a barrier before being entitled to promised resources.

Pledged resources with conditions

Can't be recognized at all until conditions have been satisfied

What happens if a NPO receives a contribution that don't benefit the NPO but a 3rd party beneficiary?

If the donee and NPO is not financially interrelated, or if the NPO DOES NOT have variance power (ability to redirect funds without permission from donee), recognize as a LIABILITY.

A donation in which you're required to sell with proceeds for a specific purpose is considered

A donor restriction

Contribution Revenue when goods are exchanged

Fair value of amount received
- Fair value of resources given up
= Contribution revenue

Term vs regular endowments

Term: Allow a portion of principal to be spent each period

Regular endowment: Does not allow any of the principal to be spent

Both are donor restrictions

Split-interest arrangement

When donor / beneficiary and NPO receive benefits.

Have 2 components: Lead interest, Remainder interest.

Donor will receive endowment until death, NPO receives remainder.

Net patient service revenue

Gross patient service revenue
- Charity care
- discounts
- implicit price concessions
= net patient service revenue

When determining net patient service revenue, how do you treat credit loss expense?

It's an operating expense.

It's not included in the calculation of revenue.

How are asset reclassifications (e.g. from donor restricted to unrestricted) reported?

On statement of activities

Statement of activities demonstrate how the NPO's resources are spent and where they come from. Shows revenues, expenses, and change in net assets. All expenses are from without donor restrictions (must reclass from restricted to without restrictions to expense)

What kind of activity (operating, investing, financing) is "cash contributions restricted by the donor to the acquisition of property" for a NPO?

Financing inflow

Financing relate to most long term liability transactions. Inflows include proceeds from loans, and outflows include principal payments on loans. Contributions with donor restrictions for long term purposes are also included.

What kind of activity (operating, investing, financing) is "cash expenditures to acquire property with donation in above item" for a NPO?

Investing outflow

Investing relates to most long term asset transactions. Inflows include proceeds from sale of assets, outflows include payment or asset purchases.

"Revenue" vs "contribution with (or) without donor restriction"

Revenue when recording service income from NPO's primary operations

Contribution w/wo donor restriction is the revenue journal entry to record donations.

What's the journal entry to record reclass from restricted to unrestricted?

DR Net assets released from donor restrictions out
CR Net assets released from donor restrictions in

What account do you debit when recording donations?

Asset

NOTE: It's not net assets without donor restriction, contribution - unrestricted, etc. JUST ASSET