Chapter 12: Accounting for Not-for-Profit Organizations
Multiple Choice
1.For not-for-profit entities, external financial reporting focuses on:
a.individual funds
b.fund groups
c.the organization as a whole
d.major funds
Answer:c
2.When a not-for-profit entity's funds are classified as restricted, who has imposed the restrictions?
a.the entity's board of trustees
b.donors
c.the bondholders
d.government regulators
Answer:b
3.Under which of the following circumstances would a not-for-profit organization's net assets be classified as temporarily restricted?
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.donors stipulate 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 organization requires a percentage of maximum debt service to be set aside in a sinking fund
Answer:a
4.In which classification of net assets are expenses reported?
a.only in unrestricted net assets
b.only in temporarily restricted net assets
c.either in unrestricted or temporarily restricted net assets
d.either in unrestricted, temporarily restricted, or permanently restricted net assets
Answer:a
5.The FASB requires not-for-profits to report net assets and resource inflows and outflows in which categories?
a.Current and noncurrent
b.Unrestricted, temporarily restricted, or permanently restricted depending on the existence and nature of donor restrictions
c.Unrestricted, temporarily restricted, or permanently restricted depending on the existence and nature of donor and creditor restrictions
d.Unrestricted, temporarily restricted, or permanently restricted depending on the existence and nature of creditor, donor, and supplier restrictions
Answer:b
6.A not-for-profit organization receives $3,400,000 of pledges in its annual telethon. When should the organization recognize contribution revenue?
a.when cash is received
b.when the pledges are received, provided they are in written form
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 unrestricted
Answer:c
7.A not-for-profit 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 unrestricted net assets because the restriction is from a creditor relationship
b.As temporarily restricted net assets until the money is used on the building project
c.As temporarily restricted net assets until the line of credit is repaid and the separate account closed.
d.As restricted net assets
Answer: b
8.Ken Labich promises to give a not-for-profit university $2 million for a new library, but only if the university is able to raise an equal amount in cash from other donors. When should the university recognize Ken’s promise as revenue?
a.when it receives Ken’s promise
b.when it receives Ken’s promise, provided it also fully discloses (in notes to the financial statements) the conditions set forth in Roger's promise regarding other contributions
c.gradually; that is, each time it receives cash from another donor, the entity would recognize a portion of Ken’s promise as revenue
d.when the conditions imposed by Ken are substantially met; that is, when it receives approximately $2 million in cash from other donors
Answer:d
9.Ruth Richter gives a not-for-profit entity $25,000 in cash. She tells the entity that it may use the gift for 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?
a.Unrestricted support - contributions
b.Temporarily restricted support - contributions
c.Refundable advance (deferred revenue)
d.Allowance for uncollectible contributions
Answer:c
10.The Turtle Island Singers receive three gifts during the year 2012: (a) $3,000, which may be used for any purpose at any time; (b) $5,000, which must be used for a special concert in a nursing home; and (c) $1,000, which may be used for any purpose, but only in the year 2013. When it receives the gifts, how should the entity classify them:
a.$3,000 as unrestricted revenue and $6,000 as temporarily restricted revenue
b.$4,000 as unrestricted revenue and $5,000 as temporarily restricted revenue
c.$8,000 as unrestricted revenue and $1,000 as temporarily restricted revenue
d.$9,000 as unrestricted revenue
Answer:a
11.In response to a fund-raising campaign, an electric utility provides free electricity to a not-for-profit entity. How should the not-for-profit 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.
Answer:c
12.A group of citizens donate their time to construct a building to provide shelter for the homeless, to be run by a not-for-profit 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.
Answer:b
13.A not-for-profit entity conducts a special fund-raising campaign at the end of fiscal year 2012, intended to raise funds for general operations that take place during fiscal year 2013. 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 unrestricted contribution revenue in 2012
b.recognize the amount pledged (net of a $50,000 allowance for estimated uncollectibles) as unrestricted contribution revenue in 2012
c.recognize the amount pledged (net of a $50,000 allowance for estimated uncollectibles) as temporarily restricted contribution revenue in 2012; and report the 2013 expenses as changes in temporarily restricted net assets in 2013
d.recognize the amount pledged (net of a $50,000 allowance for estimated uncollectibles) as temporarily restricted contribution revenue in 2012; and reclassify the net assets as unrestricted at the beginning of 2013
Answer:d
14.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 not-for-profit entity. On December 31, the stock has a fair value of $8,200. At what amount should the entity value the stock on its December 31 statement of financial position?
a.$8,000
b.$8,200
c.$8,700
d.$9,500
Answer:b
15.According to the Financial Accounting Standards Board, the distinguishing characteristics of not-for-profit organizations (NFPOs) do not include which of the following?
a.NFPOs can issue debt on which the interest is exempt from federal taxation
b.NFPOs receive significant contributions from resource providers who do not receive proportionate value in return
c.NFPOs operate for purposes other than to provide goods and/or services at a profit
d.NFPOs do not have defined ownership interests that can be sold or transferred
Answer:a
16.Steve Watson, a local certified public accountant (CPA), donates a significant amount of his spare time to Beth’s Gallery, a not-for-profit 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
Answer:c
17.Which of the following financial statements is not required to be prepared by not-for-profit organizations?
a.statement of financial position
b.statement of donations and contributions received
c.statement of cash flows
d.statement of activities
Answer:b
18.Showing the amount and nature of donor-imposed restrictions on the statement of net assets helps financial statement readers to assess a not-for-profit organization's
a.corporate responsibility
b.budgetary compliance
c.financial flexibility
d.liquidity
Answer:c
19.A not-for-profit organization receives a pledge from a donor in fiscal 2013. The terms of the pledge are such that the organization will receive a large contribution in fiscal 2015. At what value should the pledge be reported in the organization's 2013 statement of financial position?
a.face or nominal value
b.compound value
c.marginal value
d.present value
Answer:d
20.Which of the following characteristics of a brochure prepared by an NFPO is not relevant to whether the cost of the brochure can be allocated between program and fund-raising functions?
a.page count
b.content
c.purpose
d.audience
Answer:a
21.The Bob Buckham Senior Center, a not-for-profit 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 notesDisclose in the notes
b.Disclose in the notesReport $12,000 revenue and expense
c.Report $10,000 revenue and expenseDisclose in the notes
d.Report $10,000 revenue and expenseReport $12,000 revenue and expense
Answer:c
22.Not-for-profit colleges and universities are required to follow the accounting standards of which standard-setting body?
a.FASB
b.GASB
c.GASAC
d.FASAB
Answer:a
23.A not-for-profit arts organization receives a $300,000 gift from a donor who specifies that the gift must be maintained in perpetuity and that the income from the gift is to be used only to take disabled persons to the theater. How should the entity report the $300,000 gift in the net asset section of its statement of financial position?
a.as unrestricted
b.as temporarily restricted
c.as permanently restricted
d.as restricted for programs for the disabled
Answer:c
24.A not-for-profit arts organization receives a $300,000 gift from a donor who specifies that the gift must be maintained in perpetuity, and the income from the gift is to be used only to take disabled persons to the theater. The entity derives $20,000 from investing the gift, but has not spent it by year-end. How should the entity report the $20,000 of resources in the net asset section of its statement of financial position?
a.as unrestricted
b.as temporarily restricted
c.as permanently restricted
d.as permanently restricted, with a note describing how the resources will be used
Answer:b
25.A not-for-profit 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.
Answer:d
26.A not-for-profit museum holds a collection of historical treasures. It manages the treasures in a manner that meets all three criteria permitting the option to either capitalize the collection or not. The museum has chosen not to capitalize its collection. It then receives a donation of several items that it intends to sell to help meet operating expenses. How should the museum account for the donated items?
a.It must recognize the fair value of the donated items as revenues or gains and assets when it receives the donation.
b.It has an option either to recognize or not to recognize the fair value of the donated items as revenues or gains when it receives the donation.
c.It may not recognize a revenue or gain until it sells the donated items.
d.It must disclose the donation in the notes to the financial statements, but it may not recognize a revenue or gain until it sells the donated items.
Answer:a
27.A not-for-profit 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.
Answer:b
28.A not-for-profit 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 the art works need not be depreciated if the collection meets the three criteria established by the FASB.
Answer:d
29.On March 1, 2012, a not-for-profit organization received a donation of securities worth $4,500. When it prepared its financial statements at December 31, 2012, the securities had a fair value of $5,200. When it sold the securities on June 30, 2013, 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 report its gains and losses in 2012 and 2013?
a.no change in 2012; a gain of $100 in 2013
b.a gain of $100 in 2012; no change in 2013
c.a gain of $700 in 2012; a loss of $600 in 2013
d.no change in 2012; a loss of $600 in 2013
Answer:c
30.In not-for-profit accounting, under what circumstances does a reclassification occur?
a.Temporarily restricted net assets are released from time or purpose restrictions.
b.Unrestricted net assets are reclassified to temporarily restricted net assets.
c.Resources of the current unrestricted fund are transferred to the land, building and equipment fund.
d.A pledge previously classified as a "conditional promise" becomes "unconditional."
Answer:a
31.A donor had previously donated $2,000 to a not-for-profit 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 temporarily restricted column of the statement of activities.
b.An expense is reported in the temporarily restricted column of the statement of activities, temporarily restricted net assets are increased, and unrestricted net assets are decreased.
c.An expense is reported in the unrestricted column of the statement of activities.
d.An expense is reported in the unrestricted column of the statement of activities, unrestricted net assets are increased, and temporarily restricted net assets are decreased.
Answer:d
32.A not-for-profit organization uses fund accounting. Which of the following transactions is likely to be accounted for in a Restricted Current Fund?
a.a donation of $10,000 that may be used for any purpose designated by the trustees
b.a donation of $50,000 that must be used to purchase a new building
c.a donation of $500,000 that must be kept intact in perpetuity
d.a grant of $30,000 that must be used to operate a day-care center for one year
Answer:d
33.A not-for-profit 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 should this fund be reported?
a.Unrestricted
b.Temporarily restricted
c.Permanently restricted
d.Endowment funds
Answer:a
34.A not-for-profit university uses fund accounting. It maintains a Loan Fund to account for its extensive program of financial assistance to students. The Loan Funds are derived from many sources, including both donations and amounts set aside by the university's governing board. When it prepares its statement of financial position, how should the university classify the net assets of the Loan Fund?
a.All net assets should be classified as temporarily restricted.
b.All net assets should be classified as permanently restricted.
c.Net assets should be classified as either temporarily or permanently restricted, depending on the restrictions imposed by the governing board and the donors.