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
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
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
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
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
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
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
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
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
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
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.
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.
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
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
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
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
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
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
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
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
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 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
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
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
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
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.
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.
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.
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.
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
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.”
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.
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
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
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.
d. Net assets set aside by the governing board should be classified as unrestricted, and net
assets from donations should be classified as temporarily or permanently restricted,
depending on the nature of the donor-imposed restrictions.
35. Say No To Meth, a not-for-profit 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 mailing the
brochure in its statement of activities?
a. The entire $30,000 must be reported as a fund-raising expense.
b. The entire $30,000 must be reported as a program expense.
c. The $30,000 should be allocated between fund-raising and program expenses, using
appropriate cost accounting techniques.
d. The $30,000 should be reported under the caption “Program and fund-raising
expenses.”
36. A not-for-profit secondary school sends a 8-page brochure to the parents and
alumni of the school. The brochure describes the school’s programs and discusses
the achievements of some of its graduates. Five pages list the names of all
contributors during the previous year and the last page contains an appeal for funds.
How should the organization report the expense of printing and mailing the
brochure?
a. All costs should be reported as program expenses.
b. All costs should be reported as fund-raising expenses.
c. The costs should be allocated between program and fund-raising expenses, using
appropriate cost accounting techniques.
d. All costs should be reported under a single caption “Program and fund-raising
expenses.”
36. A not-for-profit 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 unrestricted net assets
b. as an increase in temporarily restricted net assets
c. as an increase in permanently restricted net assets
d. as an increase in any of the net asset classifications directed by the entity’s trustees
37. A not-for-profit entity receives equipment having a fair value of $50,000 as a gift.
How should the gift be reported in the entity’s financial statements?
a. as an asset and as an increase in permanently restricted net assets
b. as an asset and as an increase in unrestricted net assets
c. as a footnote only, because gifts of equipment are not be reported on the face of
financial statements
d. as an asset and as an increase in temporarily restricted net assets
38. Which of the following is true regarding the Financial Accounting Standards Board
requirements for a not-for-profit 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 required, but reporting by net asset classification is required.