Professional Documents
Culture Documents
AFAR-19 (Not-for-Profit Organizations)
AFAR-19 (Not-for-Profit Organizations)
NOT-FOR-PROFIT ORGANIZATIONS/ENTITIES
Accounting Principles Applicable to Not-for-Profit Organizations/Entities
Not-for-profit organizations account for revenues and expenses using the accrual basis of accounting.
Classification
The organization’s net assets, revenue, expenses, gains, and losses are classified according to the three classes of net assets.
This division of net assets into unrestricted, temporarily restricted, and permanently restricted classifications is the core of the
financial statement presentations for not-for-profit entities.
Two major sources of revenues in Not-for-Profit Organization:
1. Contributions, and
2. Regular type of revenue such as tuition fee for schools and universities, patient service revenue for hospitals, membership
dues, sales of publications and supplies and program service fees such as advising for voluntary health and welfare
organization
➢ Only contributions are subject to RESTRICTION since they are imposed by the donor, while the regular
type of revenue is unrestricted or even though restricted but made by the board of trustees it is
still classified as unrestricted since the board can lift anytime such restriction.
➢ Contributions are considered as non-exchange transactions which may include cash, securities, land and
buildings. It also includes noncash items or gifts in kind such as free or discounted use of facilities or utilities,
donated materials and supplies, intangible assets, and services of unpaid workers.
➢ Exceptions to the general recognition provision are made for contributions of services and donated
works of art.
➢ Donated services are recognized only, if they:
1. Create or enhance nonfinancial assets, or
2. Require specialize skills, are provided by individuals possessing those abilities and typically would have to
be purchased if not provided by donation.
All of these items are recorded at fair value at the date of the gift or donations were made. In the case of
noncash gifts, a corresponding expense is recorded.
➢ Revenues, gains and losses can be reported in each net asset class, but expenses are reported only in
the UNRESTRICTED NET ASSSETS CLASS .
Financial Statements
Not-for-Profit Organizations provides a set of financial statements that includes:
a. Statement of Financial Position (balance sheet),
b. Statement of Activities,
c. Statement of Cash Flows, and
d. Accompanying notes.
Voluntary Health and Welfare Organization also must provide a Statement of Functional Expenses. This statement
reports expenses by both function (program and supporting) and by their natural classification (salaries expense, depreciation
expenses, etc.)
Plant Funds
1. Unexpended Plant Fund contains assets set aside for the future acquisition of a college’s /universities plant
assets.
2. Fund for Renewals and Replacement contains assets set aside for the renewals and replacements of a college’s
/universities existing plant assets.
3. Fund for Retirement of Indebtedness contains assets set aside for the retirement of college’s/universities long-
term indebtedness.
4. Investment in Plant Fund - accounts for the funds already spent and thus represents the investment in plant
assets except for investments in plant assets held in endowment and annuity and life income funds. This fund
contain liabilities related to the plant assets carried in this fund, namely, accounts payable, notes payable, and
mortgages payable.
Illustrative Example:
Transactions Journal Entries
1. Received cash arising from:
Tuition fee, P100,000 Cash………………………………………………….200
Contribution- Revenue – TF – Unrestricted………….. 100
Unrestricted, P30,000 Contribution – Unrestricted…………….. 30
Temporary restricted – time, P20,000 Contribution – TR – time………………… 20
Temporary restricted – purpose, P40,000 Contribution – TR – purpose…………… 40
Permanently restricted, P10,000 Contribution – PR…………………………… 10
2. Payment of expenses of P35,000, of which Expenses – Unrestricted……………………… 35
P7,000 is from restricted (purpose). Cash…………………………………………….. 35
35. For the 20x5 First Semester, University of San Carlos (USC) assessed its students P4,000,000 (net of refunds), covering and
tuition and fees for educational and general purposes. However, only P3,700,000 was expected to be realized because tuition
remissions of P80,000 were allowed to faculty member’s children attending USC, and scholarships with services rendered to
the university totaling P220,000 were granted to students. What amount should USC include in gross educational and general
current fund/gross revenues from student tuition and fees?
a. P4,000,000 b. 3,920,000 c. P3,780,000 d. 3,700,000
38. University of Cebu, a private not-for-profit university, had the following cash inflows during the year ended June 30, 20x5:
(1) P500,000 from students for tuition.
(2) P300,000 from a donor who stipulated that the money be invested indefinitely.
(3) P100,000 from a donor who stipulated that the money be spent in accordance with the wishes of University of Cebu's
governing board.
On University of Cebu's statement of cash flows for the year ended June 30, 20x5, what amount of these cash flows should
be reported as operating activities?
a. P900,000 b. 400,000 c. P800,000 d. 600,000
General Fund is an unrestricted fund used to account for the day-to-day operations of a health care provider, and it may
be used by the governing board for any designated purpose other than restricted resources imposed by grantors and donors . The
general fund used by a hospital or other health care provider is similar to the current fund – unrestricted used by a college
or a university.
1. Assets whose use is limited include assets set aside by the governing board for identified purpose.
2. Agency Funds are included in General Funds as both an asset and a liability. Although not prescribed as a fund
for hospital accounting, an agency fund may be used by hospitals to account for fees collected as an agent for
physicians who have private-practice patients coming to hospital offices provided to the staff physicians. The hospital
would remit the fees collected to the physicians less charges for rental and administrative costs.
3. Property and equipment used for general operations, and the related liabilities, are reported in General
Funds.
Property and equipment whose use is restricted (e.g., real estate investments of Endowment Funds) are reported
in the appropriate donor-restricted fund.
Donor-Restricted Funds
1. Temporary restricted fund may be a specific purpose fund, a term-endowment fund, or a plant replacement and
expansion fund. An annuity and life income fund similar to that of colleges and universities may also be included as
a temporarily restricted fund.
a. Specific Purpose Fund is a restricted fund used by health care providers to account for principal and income in
accordance with donor’s specified restrictions. A specific purpose fund is very similar to the current fund – restricted
used by colleges and universities.
b. Endowment Fund is used by a hospital to account for a trust where the principal must be kept intact and the
income be expended for either current operations or a specific purpose in accordance with the grantor’s wishes . An
endowment fund for a hospital is very similar to endowment fund for colleges and universities.
The endowment may be in perpetuity, or it may be a fixed term or until a specific event occurs.
An endowment fund that is for fixed term is known as a term endowment fund. At the end of its life, the
principal in the term endowment fund is transferred to another restricted fund – a specific purpose fund, a plant
replacement fund and expansion fund, or the general fund – in accordance with the donor’s wishes.
c. Plant Replacement and Expansion Fund is a restricted fund used by hospitals and other health care providers
to account for a donor’s contributions that must be used to acquire property, plant and equipment (PPE).
2. Permanently Restricted Fund is also an endowment fund, but differs from a term-endowment fund is that
the principal must be maintained intact in perpetuity and only the income may be used in accordance with the
donor’s wishes.
4. Inventory donated for use in hospital’s principal operations should be reported as:
a. Other Operating Revenues c. Additions to unrestricted net assets
b. Nonoperating Revenues d. Additions to restricted net assets
5. A gift to a not-for-profit hospital restricted by the donor for use in a current, specific operation should be recorded in the:
a. General Fund c. Endowment Fund
b. Specific-Purpose Fund d. Enterprise Fund
6. The property, plant and equipment of a health care entity should be accounted for as part of:
a. General Funds c. Specific Purpose Funds
b. Restricted Funds d. Plant Expansion and Replacement Funds
7. Which of the following would be included in the general funds of a not-for-profit health care entity?
a. Permanent Endowments
b. Term Endowments
c. Board designated funds originating from previously accumulated income
d. Plant expansion and replacement funds
8. UST Hospital’s accounting records disclosed the following information:
* Net resources invested in plant assets……………………………………….......P10,000,000
* Board designated funds (assets whose use is limited)………………………. 2,000,000
What amount should be included as part of general funds?
a. P12,000,000 c. P 2,000,000
b. 10,000,000 d. –0-
9. In 20x8, USC Hospital received P250,000 pure endowment fund grant. Also in 20x8, USC Hospital’s original governing board
designated, for special uses, P300,000 which had originated from unrestricted gifts. What amount of these resources should
be accounted for as part of general funds?
a. P -0- c. P 300,000
b. 250,000 d. 550,000
10. Alice makes a cash gift which has no strings attached to a not-for-profit hospital. It is recorded as:
a. Patient Service Revenue.
b. Other Operating Revenue--Unrestricted Contribution.
c. Nonoperating Revenue--Unrestricted Contribution.
d. an increase in the fund balance of the General Fund.
11. Atlee makes a cash gift to a not-for-profit hospital which is restricted by the donor to buy toys for the pediatric ward. It
should be recorded in the:
a. General Fund.
b. Specific-Purpose Fund.
c. Endowment Fund.
d. Enterprise Fund.
12. Under CPU Hospital’s established rate structure, the hospital would have earned patient service revenue of P9,000,000 for
the year ended December 31, 20x5. However, P6,750,000 was collected because of charity allowances of P1,500,000 and
discounts of P750,000 to third-party payors. For the year ended December 31, 20x5, what amount should CPU record as net
patient service revenue?
a. P6,750,000 c. P8,250,000
b. 7,500,000 d. 9,000,000
13. Under STU Hospital’s established rate structure, the hospital would have earned patient service revenue of P7,000,000 for
the year ended December 31, 20x4. However, STUH did not expect to collect this amount because of charity allowances of
P1,000,000 and discounts of P500,000 to third party payers. In May 20x4, STUH purchased bandages from Ace Supply Co.
at a cost of P5,000. However, Ace notified STUH that the invoice was being cancelled and that the bandages were being
donated to STUH. For the year ended December 31, 20x4, how much should STUH record as patient service revenue?
a. P7,000,000 c. P6,000,000
b. P6,500,000 d. P5,500,000
15. A not-for-profit hospital provides its patients with services that would normally be charged at P1 million. However, it estimates
a P200,000 reduction because of contractual adjustments. It expects another P100,000 reduction because of bad debts.
Finally, the hospital does not expect to collect P400,000 because this amount is deemed to be charity care. Which of the
following is correct?
a. Patient service revenues P1 million; net patient service revenues = P300,000.
b. Patient service revenues = P1 million; net patient service revenues = P400,000.
c. Patient service revenues = P600,000; net patient service revenues = P300,000.
d. Patient service revenues P600,000, net patient service revenue P400,000.
Items 23 through 26 are based on the following information pertaining to GNC Hospital for the year ended May
31, 20x5:
In March 20x5, a P300,000 unrestricted bequest an a P500,000 pure endowment grant were received. In April 20x5, a bank
notified GNC that the bank received P10,000 to be held in permanent trust by the bank. GNC is to receive the income from this
donation.
23. GNC should generally record the P300,000 unrestricted bequest as:
a. A nonoperating gain/revenue c. A direct credit to the fund balance
b. Other revenue d. A credit to operating expenses
Revenues are recoded using the full accrual basis. A distinction should be made between Public Support and Revenues.
Public Support is the inflow of resources from voluntary donors who receive no direct, personal benefit from the
organization’s usual programs in exchange for their contributions. They include the following:
a. Contributions
b. Special Events Support
c. Legacies and Bequests
d. Proceeds from fundraisers
Revenues are inflows of resources resulting from a charge for service from financial activities or from other exchange
transactions.
a. Membership Dues
b. Program Service Fees
c. Sales of Publications and Supplies for proceeds from the sales of these items
d. Investment Income e.g., interest dividends, and other earnings.
Expenses are classified as program services and supporting services and are reported on a functional basis
under these classifications.
Program services relate to the expenses incurred in providing the organization’s social service activities.
Supporting services consist of administrative expenses and fund-raising costs.
2. Current Fund – Restricted. This fund is used for operations, but only in accordance with a donor or grantor’s
specifications.
Restricted pledges to be used to promote the adoption of handicapped children would be recorded in this classification.
3. Land, Building, and Equipment Fund. This fund is used to account for:
a. Land, buildings, and equipment acquired by the organization;
b. Liabilities arising from the acquisition or improvement of plant assets;
c. Current assets restricted by donors or grantors for future disposition.
4. Endowment Fund. This fund is used to accounts for permanently restricted endowment principal to be maintained intact
either in perpetuity or until a specific event occurs and temporary restricted term endowments.
5. Custodian Fund. A fund “established to account for assets received by an organization to be held or disbursed only on
instructions of the person or organization from whom they were received.” This fund is similar to agency fund of a college or
university. The assets do not belong to the organization.
12. Arbor Haven, a voluntary welfare organization funded by contributions for the general public, received unrestricted pledges
of P500,000 during 2005. It was estimated that 12% of these pledges would be uncollectible. By the end of 2005, P400,000
of the pledges had been collected, and it was expected that P40,000 more would be collected in 2006, with the balance of
P60,000 to be written of as uncollectible. Donors did not specify any periods during which the donations were to be used.
What amount should Arbor Haven include under public support in 2005 for contributions?
a. P500,000 c. P440,000
b. 452,000 d. 400,000
13. Lema Fund, a voluntary welfare organization funded by contributions from the general public, received unrestricted pledges
of P200,000 during 2005. It was estimated that 10% of these pledges would be uncollectible. By the end of 2005, P130,000
of the pledges had been collected. It was expected that P50,000 more would be collected in 2006 and that the balance of
P20,000 would be written off as uncollectible. What amount should Lema include under public support in 2005 for net
contributions?
a. P200, 000 c. P150,000
b. 180,000 d. 130,000
14. Apex Inc. donated a computer to Bird Shelter, a voluntary organization. The computer cost Apex P40,000. On that date, it
had a book value of P25, 000 and a market value of P20,000. Bird Shelter’s depreciation expense should be based on:
a. P 40,000 c. P 20,000
b. 25,000 d. 15,000
15. Good Hope, a voluntary health and welfare organization, received a cash donation of P500,000 from Mr. Charles Peobody on
November 15, 2005. Mr. Peobody requested that his donation be used to acquire equipment for the organization. Good Hope
used the donation to acquire equipment costing P500,000 in January of 2006. For the year ended December 31, 2005, Good
Hope should report the P500,000 contribution on its:
a. Statement of activities as unrestricted revenue.
b. Statement of financial position as temporarily restricted deferred revenue.
c. Statement of financial position as unrestricted deferred revenue.
d. Statement of activities as temporarily restricted revenue.
16. United Ways, a voluntary health and welfare organization, received a contribution of P10,000 from a donor in 2005. The donor
did not specify any use restrictions on the contribution; however, the donor specified that the donation should not be used
until 2006. The governing board of United Ways spent the contribution in 2006 for fund-raising expenses. For the year ended
December 31, 2005, United Ways should report the contribution on its
a. Statement of financial position as deferred revenue.
b. Statement of activities as unrestricted revenue..
c. Statement of financial position as increase in fund balance.
d. Statement of activities as temporarily restricted revenue.
17. Which of the following transactions of a voluntary health welfare organization would increase temporarily restricted net assets
on the statement of activities for the year ended June 30, 20x5?
I. Received a contribution of P10,000 from a donor on May 15, 20x5, who stipulated that the donation not be spent
until August of 20x5.
II. Spent P25,000 for fund-raising on June 20, 20x5. The amount expended came from a P25,000 contribution on March
12, 20x5. The donor stipulated that the contribution be used for fund-raising activities.
a. Both I and II c. I only
b. Neither I nor II d. II only
18. United Hope, a voluntary health and welfare organization, received the following contributions in 20x5:
I. P500 from donors who stipulated that the money not be spent until 20x6.
II. P1,000 from donors who stipulated that the contributions be used for the acquisition of equipment, none of which
was acquired in 20x5.
Which of the above events increased temporarily restricted net assets for the year ending December 31, 20x5?
a. I only c. II only
b. Both I and II d. Neither I nor II
19. On December 31, 20x5, Hope Haven, a voluntary health and welfare organization, received a pledge from a donor who
stipulated that P1,000 would be given to the organization each year for the next 5 years, starting on December 31, 20x6.
Present value factors at 6% for 5 periods are present below:
Present value of an ordinary annuity for 5 periods at 6%................................ 4.21236
Present value of an annuity due for 5 periods at 6%...................................... 4.46511
25. A CPA donates her services to prepare the annual financial report for a voluntary health and welfare organization. The
services should be recorded as:
a. revenues-unrestricted.
b. accounting expenses.
c. a footnote disclosure in the financial report.
d. both a and b are correct.
26. Donated services are recognized as a contribution if:
a. they create or enhance nonfinancial assets.
b. they require specialized skills and the individuals performing the donated service possess those
skills.
c. the organization would otherwise purchase the service.
d. All of the above are correct.
27. Contribution of a work of art to a museum for public exhibit would
a. be recognized as a contribution at fair market value.
b. be recognized as operating revenue based upon admission fees.
c. be recognized as an asset subject to depreciation.
d. not be recognized as a contribution.
Other Not-for-Profit Organizations
The term “other not-for-profit organizations” includes all non-business organizations such as the following:
Cemetery organizations Private and community foundations
Civic and fraternal organizations Professional associations
Fraternal Organizations Public broadcasting stations
Labor Unions Religious organizations
Libraries Research and scientific organizations
Museums Social and country clubs
Other cultural arts Trade associations
Performing arts Zoological societies
Political parties Botanical societies
2. The statement of financial position (balance sheet) for Founders Library should report separate peso amounts for the library's
net assets according to which of the following classifications?
a. Unrestricted and permanently restricted.
b. Temporarily restricted and permanently restricted.
c. Unrestricted and temporarily restricted.
d. Unrestricted, temporarily restricted, and permanently restricted.
3. Chicago Museum has both regular and term endowments. On the museum's statement of financial position (balance sheet),
how should the net assets of each type of endowment be reported?
Term endowments Regular endowments
a. Temporarily restricted Permanently restricted
b. Permanently restricted Permanently restricted
c. Unrestricted Temporarily restricted
d. Temporarily restricted Temporarily restricted
4. On the statement of activities for a not-for-profit performing arts center, expenses should be deducted from
I. Unrestricted revenues.
II. Temporarily restricted revenues.
III. Permanently restricted revenues.
a. I, II, and III. c. I only
b. Both I and II. d. II only
5. Gamma Pi, a fraternal organization, should prepare a statement of financial position and which of the following statements?
I. Statement of activities.
II. Statement of changes in fund balances.
III. Statement of cash flows.
a. I, II, and III. c. II and III.
b. III only. d. Both I and III.
6. For Guiding Light, a religious organization, net assets which can be expended in accordance with the wishes of the governing
board of the organization should be reported as
I. Unrestricted. II. Temporarily restricted. III. Permanently restricted.
a. I only c. I, II, and III
b. Both I and II d. I or II
7. Rosary Botanical Gardens established a P500,000 quasi-endowment on September 1, 2003. On the garden's statement of
financial position at December 31, 2003, the net assets in this quasi endowment should be included in which of the following
classifications?
a. Temporarily restricted net assets.
b. Unrestricted net assets.
c. Permanently restricted net assets.
d. Either temporarily or permanently restricted net assets, depending on the expected term of the quasi endowment.
8. Save the Planet, a research organization, received a P500,000 contribution from Ms. Susan Clark stipulated that her donation
be used to purchase new computer equipment for Save the Planet's research staff. The contribution was received in August
of 20x3, and the computers were acquired in January of 20x4. For the year ended December 31, 20x3, the P500,000
contribution should be reported by Save the Planet on its
a. Statement of activities as unrestricted revenue.
b. Statement of activities as deferred revenue.
c. Statement of activities as temporarily restricted revenue.
d. Statement of financial position as deferred revenue.
10. A storm broke glass windows in the building of Lea Meditators, a not-for-profit religious organization. A member of Lea's
congregation, a professional glazier, replaced the windows at no charge. In Leah's statement of activities, the breakage and
replacement of the windows should
a. Not to be reported.
b. Be reported by note disclosure only.
c. Be reported as an increase in both expenses and contributions.
d. Be reported as an increase in both net assets and contributions.
11. During the year ended December 31, 20x5, the Kimdrei Community Foundation received the following contributed services:
I. Anderson & Anderson, attorneys-at-law, contributed their services which involved advice related to the foundation's
regular endowments.
II. Senior citizens participated in a telethon to raise money for a new music building.
Which of these contributed services should be included in unrestricted revenues, gains, and other support on Kimdrei
Community Foundation's statement of activities for the year ended December 31, 20x5?
a. Both I and II. c. II only
b. Neither I nor II. d. I only
12. In a not-for-profit organization, depreciation on capital assets is recognized on all but which of the following?
a. contributed assets. c. equipment
b. building. d. work of art intended for display
13. On January 2, 20x5, a nonprofit botanical society received a gift of an exhaustible fixed asset with an estimated useful life of
10 years and no salvage value. The cost’s of this asset was P20,000 and its fair market value at the date of the gift was
P30,000. What amount of depreciation of this asset should the society recognize in its 20x5 financial statements?
a. P 3,000 c. P 2,000
b. 2,500 d. 0
14. Anton Environs, a community foundation, incurred P10,000 in management and general expenses during 20x5. In Anton
Environs’ statement of activities for the year ended December 31, 20x5, the P10,000 should be reported as:
a. A direct reduction of unrestricted net assts.
b. Part of supporting services expense.
c. Part of program services expense.
d. Contra-account to offset revenue and support.
15. When a nonprofit organization combines fund-raising efforts with educational efforts or program services, the total combined
costs incurred are:
a. Reported as program services expenses.
b. Allocate between fund-raising and program services expenses using an appropriate allocation basis.
c. Reported as fund-raising costs.
d. Reported as management and general expenses.
16. The Jackson Foundation, a not-for-profit organization, had the following cash contributions and expenditures in 20x5:
* Unrestricted cash contributions of P500,000.
* Cash contributions of P200,000 restricted by the donor to the acquisition of property
* Cash expenditures of P200,000 to acquire property with the donation in the above item.
Jackson's statement of cash flows should include which of the following amounts?
Operating activities Investing activities Financing activities
a. P700,000 P(200,000) P 0
b. P500,000 P 0 P 0
c. P500,000 P(200,000) P200,000
d. P 0 P 500,000 P200,000
17. During the year ended December 31, 20x5, a not-for-profit performing arts entity received the following donor-restricted
contribution and investment income.
I. Cash contribution of P100,000 to be permanently invested.
II. Cash dividends and interest of P6,000 to be used for the acquisition of theater equipment.
As a result of these cash receipts, the statement of cash flows for the year ended December 31, 20x5, would report an
increase of
a. P 106,000 from operating activities.
b. P 106,000 from financing activities.
c. P 6,000 from operating activities and an increase of P 100,000 from financing activities.
d. P 100,000 from operating activities and an increase of P 6,000 from financing activities.
***Wisdom is the quality that keeps you from getting into situations where you need it.***
***Every man is the architect of his own character.***
***Patience is bitter but its fruit is sweet.***
***Great passions, can elevate us to the things that we want to deliver.***
**Don’t think that there’s so much darkness, that it’s no use to have a small light, because even one
candle can be seen a mile away when it’s dark.**
**When all else is lost, the future still remains.**
**The greatest mistake you can make is to continually fear making mistakes.**
Great achievements are not done by strength but by perseverance.
The secret of life is not just to live, but to have something worthwhile to live for.
**Truth is the heart of life in a community with others, and truth, is of course, dishonored by a lie. A lie is
an assertion, in a context in which genuine communication is reasonably expected, of something which
one considers to be false.**
*The most difficult secret of a man to keep is the opinion he has of himself.*
*Nothing great was ever achieved without determination.*
*Don’t be discouraged; everyone who got where he is, started where he was.*
Impossibilities vanish to confront a mountain when Our Lord JESUS CHRIST is always with us.
****God’s LOVE is like a river that keeps on flowing…****