F5 NFP

Question 1

How should an NFP record funds received that are specifically pledged by the donor to another NFP?

Answer 1

Record them as a liability, not contribution revenue, because the organization is acting as an agent for the specified beneficiary. [RULE]

Question 2

When are contributed services recognized as revenue by a not-for-profit?

Answer 2

Only when the services create or enhance a nonfinancial asset, or require specialized skills, are provided by someone with those skills, and would otherwise need to be purchased. Example: a lawyer providing legal services qualifies, but a lawyer merely soliciting contributions does not. [RULE]

Question 3

How is a not-for-profit’s beneficial interest in a perpetual trust reported at year-end?

Answer 3

Report it at fair value on the statement of financial position; distributions of trust income for current unrestricted use do not reduce the beneficial interest asset. Example: initial trust value $100,000, year-end fair value increase $5,000, and $4,000 income distributed → beneficial interest reported = $105,000. [RULE]

Question 4

How is income distributed from a perpetual trust accounted for by a not-for-profit?

Answer 4

It is reported as revenue on the statement of activities; it does not reduce the beneficial interest in perpetual trust asset on the statement of financial position. [RULE]

Question 5

How should a nongovernmental not-for-profit report quoted investment debt securities?

Answer 5

At market price (fair value). [RULE]

Question 6

How are operating expenses reported by a nongovernmental not-for-profit organization?

Answer 6

How are operating expenses reported by a nongovernmental not-for-profit organization?

Question 7

How is an unconditional pledge recognized by a not-for-profit?

Answer 7

Recognize the full pledge revenue in the year the unconditional promise is made, not as cash is collected over future years.

Example: Arc Hospital received an unconditional $1 million pledge payable in four annual installments of $250,000, so it recognizes the full $1 million in Year 1 and $0 pledge revenue in Years 2–4. [RULE]

Question 8

Why are donor-restricted funds “released from restrictions” when used for their intended purpose in not-for-profit accounting?

Answer 8

Because donor-restricted contributions are recorded as net assets with donor restrictions until the organization spends them according to donor stipulations. When spent as intended, the restriction is satisfied, so the amount is reclassified (“released”) from net assets with donor restrictions to net assets without donor restrictions. This shows the restriction has been fulfilled and funds are now unrestricted.

Question 9

What types of expenses are classified as fundraising costs in a not-for-profit organization?

Answer 9

Fundraising expenses are costs incurred to induce contributions or gifts. This includes costs related to soliciting donations, such as sending unsolicited merchandise to encourage contributions, mailing campaigns, fundraising event costs, and advertising to solicit funds. These expenses are distinct from management, general, or program service expenses.

Question 10

: What two classifications are required for reporting expenses by all not-for-profit organizations?

Answer 10

Functional classification (by purpose/activity) and natural classification (by type of expense).

Question 11

Where must expenses be reported by functional classification?

Answer 11

On the face of the statement of activities.

Question 12

Where must expenses by natural classification be disclosed?

Answer 12

In the notes to the financial statements, or alternatively on the face of the statement of activities or in a separate statement.

Question 13

What are examples of functional classifications?

Answer 13

Program services, management and general, fundraising.

Question 14

What activities are classified as support services in not-for-profit financial reporting?

Answer 14

Support services include:

Management and general (administrative tasks like recordkeeping, budgeting)
Fundraising (activities to raise contributions)
Membership development (recruiting and retaining members, improving member relationships)

Question 15

What are program services in not-for-profit financial reporting?

Answer 15

Program services are the activities for which the organization is chartered or exists. These are the core missions that fulfill the organization’s purpose. Examples include:

Educational services for a school or day care
Patient care and research for a hospital
Labor negotiations and training for a union
Programs directly delivering services or goods to beneficiaries

Question 16

How should salaries be reported in a not-for-profit’s statement of functional expenses when an employee works on multiple activities?

Answer 16

Salaries must be allocated and reported based on the percentage of time spent on each activity. For example, if an employee spends 40% of time on program services and 60% on support activities, their salary should be split accordingly in the financial statements.

Question 17

Example of Statement of Financial Position

Answer 17

Assets
Cash and cash equivalents $ 10,000
Accounts receivable 5,000
Building and equipment 50,000
Assets restricted for long-term purposes 15,000
Total Assets 80,000

Liabilities
Accounts payable 8,000
Notes payable 12,000
Total Liabilities 20,000

Net Assets
Without donor restrictions 40,000
With donor restrictions 20,000
Total Net Assets 60,000

Total Liabilities and Net Assets 80,000

Question 18

What are the two classifications of net assets for not-for-profit entities?

Answer 18

With donor restrictions and without donor restrictions.

Question 19

What happens to donor-restricted net assets when the restriction is satisfied?

Answer 19

They are reclassified to net assets without donor restrictions.

Question 20

Does a board of directors’ internal designation create donor restrictions?

Answer 20

No, only restrictions imposed by external donors are considered donor restrictions.

Question 21

What type of donor contribution remains permanently restricted?

Answer 21

A perpetual endowment fund, where the principal is maintained and only investment earnings can be used.

Question 22

When is restricted cash classified as a current asset?

Answer 22

When the restriction is for a short-term purpose (within one year or operating cycle)

Expected to be used/disbursed within the next 12 months

Associated with current assets or current liabilities

Question 23

When is restricted cash classified as a noncurrent asset?

Answer 23

When the restriction is for a long-term purpose (beyond one year)

Expected to be used/disbursed after the next 12 months

Associated with noncurrent assets (like capital projects) or noncurrent liabilities

Question 24

How should operating expenses be reported in the financial statements of a nongovernmental not-for-profit organization?

Answer 24

Operating expenses are reported as decreases in net assets without donor restrictions on the Statement of Activities.

Question 25

How should a not-for-profit record grant revenue from a cost reimbursement agreement where expenses must be incurred before revenue is earned?

Question 26

What type of grant is a cost reimbursement grant?

Answer 26

A grant where revenue is recognized only after eligible expenses are incurred, meaning it has a condition that must be met before revenue recognition.

Question 27

When can revenue be recognized for a cost reimbursement grant?

Answer 27

Revenue is recognized only after the recipient incurs eligible expenses in accordance with the grant's terms.

Question 28

How is grant revenue classified if the condition is met and expenses are incurred in the same reporting period?

Answer 28

The revenue can be recognized as support without donor restrictions, provided the entity discloses and consistently applies this policy.