Chapter 13 – Accounting for Not-for-Profit Organizations
CHAPTER 13: ACCOUNTING FOR NOT-FOR-PROFIT
Chapter 13 – Accounting for Not-for-Profit Organizations
13-2
CHAPTER 13: ACCOUNTING FOR NOT-FOR-PROFIT
ORGANIZATIONS
Answers to Questions
13-1. The textbook uses the following four categories of not-for-profits: voluntary health and
welfare organizations (VHWOs), colleges and universities, health care entities, and other
nonprofit organizations (ONPOs). VHWOs receive a large amount of their revenues from
nonexchange transactions. They exist to provide health or welfare services at no cost or a
Taxonomy of Exempt Entities (NTEE) and the Internal Revenue Service.
General Problem Information: Categories of not-for-profits
Learning Objective: 13-1
Topic: Defining the Not-for-profit Sector
Bloom’s Taxonomy: Remember
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Industry
Level of Difficulty: Easy
13-2. Not-for-profit organizations and public sector organizations can be quite similar in nature
and purpose, making it difficult to sometimes determine whether an organization is an
Chapter 13 – Accounting for Not-for-Profit Organizations
13-3
Ch. 13, Answers, 12-2 (Cont’d)
General Problem Information: Characteristics of not-for-profits
Learning Objective: 13-1
Topic: Defining the Not-for-profit Sector
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: BB: Industry
Level of Difficulty: Medium
13-3. The operating statements for nongovernmental NFPs and governmental NFPs reporting
as business-type entities report substantially the same information; the form in which the
information is presented has some differences. For example:
Nongovernmental Not-for-profits
Governmental Not-for-profits
Generally titles the statement the statement
of activities
Titles the statement the statement of
revenues, expenses, and changes in net
position
Considerable flexibility in formatting the
statement
Must provide a format that identifies
operating and nonoperating activities
Reports changes in the three net asset
categories for the reporting period
Reports the changes in total net position
for the reporting period
Identifies expenses as program and support
(either on the face of the financial statement
or in the notes)
No similar requirement
General Problem Information: Operating statement differences
Learning Objective: 13-3
Topic: Financial Reporting
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting
Level of Difficulty: Medium
Chapter 13 – Accounting for Not-for-Profit Organizations
13-4
Ch. 13, Answers (Cont’d)
13-4. FASB ASC 958-205-45 requires not-for-profit organizations to separate net assets into
the three classifications of unrestricted, temporarily restricted, and permanently restricted.
Unrestricted are contributions received without restrictions on their use by donors.
Temporarily restricted net assets are contributions or unconditional promises to give for
Learning Objective: 13-3
Topic: Financial Reporting
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting
Level of Difficulty: Medium
13-5. A statement of functional expenses provides an analysis of the costs associated with each
of the program services and supporting services. It allows the ratio of program expenses
to total expenses and support expenses to total expenses to be computed and compared to
other entities. In addition, the statement of functional expenses shows the natural, line-
Chapter 13 – Accounting for Not-for-Profit Organizations
13-5
Ch. 13, Answers, 13-5 (Cont’d)
General Problem Information: Statement of functional expenses
Learning Objective: 13-3
Topic: Financial Reporting
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting
Level of Difficulty: Medium
13-6. An unconditional pledge requires the passage of time or performance on the part of the
not-for-profit entity. As a result, unconditional pledges are generally recognized in the
General Problem Information: Conditional and unconditional pledges
Learning Objective: 13-3
Topic: Financial Reporting
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting
Level of Difficulty: Medium
13-7. Expenses in a not-for-profit organization are divided into functional categories: (1)
program services, and (2) supporting services expenses. Program service expenses are
those that relate to the programs the NFP offers to the public; for example, the
Community Family Service Agency (see Illustration 13-7) reports adoption, counseling,
Chapter 13 – Accounting for Not-for-Profit Organizations
13-6
Ch. 13, Answers, 13-7 (Cont’d)
General Problem Information: Program services and supporting services
Learning Objective: 13-3
Topic: Financial Reporting
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting
Level of Difficulty: Medium
13-8. To be recorded as contribution revenue and either an expense or asset, a donated service
must (1) create or enhance nonfinancial assets or (2) require specialized skills, that are
provided by individuals possessing those skills, and typically would have to be purchased
General Problem Information: Donated services
Learning Objective: 13-3
Topic: Financial Reporting
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting
Level of Difficulty: Medium
13-9. FASB standards provide an option for reporting collections which include historical
treasures and works of art. Assuming the museum has met the criteria for recognizing its
It is also possible the museum has not met the criteria for the definition of a collection as
an asset. To meet the definition of a collection under FASB ASC 958-360-20 the museum
must:
General Problem Information: Special collections
Learning Objective: 13-3
Topic: Financial Reporting
Chapter 13 – Accounting for Not-for-Profit Organizations
13-7
Ch. 13, Answers (Cont’d)
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting
Level of Difficulty: Medium
13-10. Joint costs are the expenses incurred when the activities of a not-for-profit organization
include a fund-raising appeal with either a program or a management and general
General Problem Information: Joint costs
Learning Objective: 13-3
Topic: Financial Reporting
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting
Level of Difficulty: Medium
Solutions to Cases
13-11. a. An example of an evaluation memo would be as follows.
Date:
To: Chair, Baytown Area United Way Allocation Panel
From: [Your Name], Financial Advisor
Re: Analysis of Baytown Rehabilitative Camp for Disabled Children’s financial
condition and recommendations for FY 2018 funding
As you and the members of the panel may recall, we were quite concerned during the
evaluation of this organization for FY 2017 funding that their financial reserves were
Chapter 13 – Accounting for Not-for-Profit Organizations
13-8
Ch. 13, Solutions, Case 13-11(Cont’d)
financial condition, including such actions as more fund-raising activity and, if
necessary, cutting support staff at the camp.
When I first looked at the FY 2018 budget request and FY 2017 financial statements
for the Baytown Rehabilitative Camp, I was very surprised and pleased by the evident
So that you and the other members of the panel can see the impact this $37,500
transfer has on the camp’s financial position, I have calculated the following key
measures both including and excluding the $37,500 amount. Normally, a current
FY 2017
$37,500 Included $37,500 Excluded FY 2016
Chapter 13 – Accounting for Not-for-Profit Organizations
13-9
Ch. 13, Solutions, Case 13-11(Cont’d)
FY 2017
$37,500 Included $37,500 Excluded FY 2016
Respectfully submitted,
[Your signature]
b. The answer to part b will depend on the individual students. Students should be
concerned with funding given the camp’s use of donor-restricted funds. Students
might raise concerns about ethics and “earnings management.” The following is
provided for use in discussion.
Chapter 13 – Accounting for Not-for-Profit Organizations
13–10
Ch. 13, Solutions, Case 13-11 (Cont’d)
General Problem Information: Temporarily restricted net assets
Learning Objective: 13-3
Topic: Financial Reporting
Bloom’s Taxonomy: Analyze
Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN: Decision Making
Level of Difficulty: Hard
13-12. a. The answer to this question will depend in part on the status of the project at the time
the assignment is made. In July of 2014 it was projected that there would be an
exposure draft released in the second half of 2014.
b. The changes were proposed by the Not-for-Profit Advisory Committee, a permanent
committee of the FASB, as part of an effort to eliminate confusion regarding the
c. The second objective was to improve information provided in financial statements
and notes about liquidity, financial performance, and cash flows. The following are
some proposals that were under consideration in July of 2014.
Chapter 13 – Accounting for Not-for-Profit Organizations
13–11
Ch. 13, Solutions, Case 13-12 (Cont’d)
d. Students’ answers to this part will vary. The authors suggest grading this part based
on whether the student firmly takes a position, and then supports it adequately.
General Problem Information: Research Case—Not-for-for profit reporting model
Learning Objective: 13-2
Learning Objective: 13-3
Topic: Financial Reporting
Bloom’s Taxonomy: Analyze
Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN: Decision Making
Level of Difficulty: Hard
13-13. Issue: Is the Native American Heritage Center and Museum a governmental not-for-
profit entity or nongovernmental not-for-profit entity? This is an essential determination
because if the museum is governmental the auditor will need to examine whether the
museum’s financial statements are in conformity with GASB standards. If it is
General Problem Information: Not-for-profit or government entity
Learning Objective: 13-1
Learning Objective: 13-2
Topic: Defining the Not-for-profit sector
Bloom’s Taxonomy: Analyze
Chapter 13 – Accounting for Not-for-Profit Organizations
13–12
Ch. 13, Solutions, Case 13-13 (Cont’d)
Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN: Decision Making
Level of Difficulty: Hard
Solutions to Exercises and Problems
13-14. 1. c. 6. d.
2. b. 7. d.
General Problem Information: Various
Learning Objective: 13-1
13-15.
1. a 5. e (no indication contributions
were received at the fund-
raising event)
General Problem Information: Classification of revenues and contributions
Learning Objective: 13-3
Topic: Financial Reporting
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting
Level of Difficulty: Medium
Chapter 13 – Accounting for Not-for-Profit Organizations
13–13
Ch. 13, Solutions (Cont’d)
13-16.
1. N 5. Y
General Problem Information: Donated services
Learning Objective: 13-3
Topic: Financial Reporting
Bloom’s Taxonomy: Understand
Accreditation Skills tag: AACSB: Knowledge Application, AICPA: FN: Reporting
Level of Difficulty: Medium
13-17.
1. Based on the information provided, it appears that the purpose,
audience, and content criteria are met for this activity to be
considered a bona fide activity. The joint costs should be allocated
2. This activity fails all three criteria to be considered a bona fide
activity under FASB ASC 958-720-45. The purpose of the
13–14
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Ch. 13, Solutions, 17 (Cont’d)
attend the camp. The content of the campaign does not motivate
people to action. Simply asking people to read an informational
pamphlet is not calling them to act in a way that advances the
mission of the organization.
3. Based on the information provided, it appears that the purpose,
audience, and content criteria are met for this activity to be
considered a bona fide activity. The joint costs should be allocated
between the functional program expenses and support expenses,
4. This activity would seemingly pass the three criteria; however, it
must be classified as a fund-raising event. It would appear that the
purpose of the campaign aligns with the NFP’s mission, which is to
13–15
5. Ch. 13, Solutions, 13-17 (Cont’d)
since it is recommending that the homeowner take five steps to help
reduce the probability of fire. What prevents this activity from being
General Problem Information: Joint costs with a fund-raising appeal
Learning Objective: 13-3
Topic: Financial Reporting
Bloom’s Taxonomy: Analyze
Accreditation Skills tag: AACSB: Analytical Thinking, AICPA: FN: Decision Making
Level of Difficulty: Hard
13-18.
a. It appears there are several modifications that should be made to the ECE
statement of activities. Some problems and recommendations to bring the
statement into conformance with FASB standards include: