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 Evaluate Nonprofit Accounting Concerns

By Tanifor Che Fuhunei

Northcentral University

Febuary 12, 2017

FIN7018-8

Professor: Wendy Achilles

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Question 1:

Compare the accounting statements for not-for-profit organizations relative to for-profit

organizations.

Answer:

Not for profit organization is not only different from For profit organization in terms of goals and

needs, but, also in accounting nature and procedures.

Here are some of the major differences in for-profit and nonprofit accounting:

Reporting

Not for profit organizations use different statements and reporting methods than for-profits. A

for-profits goal is to make money, but, Not for profit overall objective is to meet the needs of the

community. For Profit are required to produce a Balance Statement that details equity and

company stock, but, Not for profit organization create a statement of Financial position, which

outlines the net assets. For profit organization also have to produce an Income Statement,

showing the companys gains, losses, revenue and expenses, while, Not for profit organizations

prepare a Statement of Activities that lists their revenue minus their expenses.

Tax Exemption

In Some cases, not for profit organizations are exempted for income taxes, but for profit firms

are not exempted from income taxes. While most nonprofit organizations are exempt from

income taxes, their donors contributions may not be tax-exempt. They are sometimes

responsible for real estate tax or sales tax, but usually they are only taxed on items that are

secondary to their scope.

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Budgeting

Budgeting is a more complex subject in not for profit organization than can be experience in for

profit making organization. Budgeting for nonprofits is driven by a missions needs and goals.

Nonprofits often have to deal with overlapping categories and constant budget modifications.

Balance Sheet

Most for-profit organizations prepare a balance sheet every quarter. A balance sheet lists the

company's owner's equity. Owner's equity is comprised of assets, which is everything the

company owns, and liabilities, which is everything the company owes to others. Owner's equity

has a direct impact on the company's common and preferred stock, if applicable. A nonprofit

does not use a balance sheet, because it has no owners. They will instead compile a "statement of

financial position," which focuses only on assets and liabilities. Adding assets to liabilities gives

the company's net assets. Accountants then scrutinize net assets to assess the financial size of the

nonprofit.

Income Statements

In addition to a balance sheet, a for-profit will prepare an income statement each quarter. The

income statement will list the company's revenues, gains, expenses and losses. The main purpose

of an income statement is to assess the company's financial performance on a quarterly basis.

This in turn has an impact on the company's value and share price, and company stockholders

have a legal right to these income statements. Nonprofit organizations, on the other hand, do not

compile an income statement but instead prepare a statement of activities each quarter. This

document simply lists the organization's revenues minus expenses, plus net assets.
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Question 2

Differentiate between governmental not-for-profit organizations and nongovernmental not-

for-profit organizations.

Answers:

Many non-governmental not for profits are categorized with churches, boys and girls clubs, and

alumni associations. while, governmental not for profit organization, has broader and

internationally goal footprint, often working in isolated and cultivate a climates of lawlessness,

and are mostly categorized with widespread famine and disease, military bases, and large scale

disaster such as hurricane relief.

Governmental not for profit organization funds may be raised by the government, but it

maintains a non-governmental position, with no need for government representation. They are

also known as civil society organizations.

A non-governmental not-profit organization uses its extra funds for the purpose of the

organization, rather than dividing it between the shareholders and the owners of the organization.

Examples of non-profits are public arts organizations, trade unions and charitable organizations.
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Question 3

The Government Accounting Standards Board (GASB) believes external users have use for

financial reports of state and local governments. Contrast and compare these with the uses

that the FASB believes external users have for the financial reports of not-for-profit

organizations.

Answer:

Financial Accounting Standard Board(FASB) identifies users of financial information as both

internal and external to the government which include: citizens, the Congress, executives, and

program managers. Thus, The FASB address both internal and external financial information

needs.

According to GASB, accountability is based on the belief that the citizenry has a "right to know"

about public resources raised during a fiscal period and the purposes for which the resources

were used. In a democratic society, public officials have an obligation to be accountable to the

public.

Financial reports can be read intelligently only by persons who understand the real meaning of

the terms used in the reports, and who understand the standards that guide the presentation of

financial information.

External users of governmental financial reports, GASB believes, need to

Compare actual financial reports with the legally adopted budget;

Assess financial reports and results of financial operations;

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Assist in determining control and compliance with finance-related laws, rules, and regulations;

and

Assist in evaluating efficiency and effectiveness.

FASB believes that financial reports of not-for-profit organizations should provide information:

Useful in making decisions on resource allocation,

Useful in assessing services and ability to provide services,

Useful in assessing management stewardship and performance, and

About economic resources, obligations, net resources, and changes in them.

Question 4

Identify the difference between a Comprehensive Annual Financial Report (CAFR) and the

GASBs 34 reporting model for state and local governments.

Answer:

Statistically, the comprehensive annual financial report (CAFR) is more inclusive than the

general purpose external financial information described in GASBS 34. The CAFR presents three

types of information:

Introductory material from the entity's management, such as transmittal letters, organizational

charts, and awards;

Financial statements (including the financial information required by GASBS 34); and

Statistical information, such as demographic information about the entity and summaries of tax

rates and property assessed values over time.

Meanwhile, GASBS 34 requires:

Management discussion & analysis (MD&A),

Government-wide financial statements,

Fund financial statements,

Notes to those statements, and

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Other Required Supplementary Information (RSI).

General Accepted Accounting Principle (GAAP) contain standards for two types of external

reports a government may issue at the completion of its financial cycle. A government may

issue a Comprehensive Annual Financial Report (CAFR), or it can issue only the basic financial

requirements of GASBS 34, and some governments will elect to issue both or some combination

of the two.

The General Purpose External Financial Statements (GPEFS) are an extracted piece of the

CAFR. Everything in the GPEFS is in the CAFR, but not everything included in a CAFR is in

the GPEFS. The non-GPEFS data contained within the CAFR is both the detail of what

constitutes the GPEFS along with summaries, statistical supplements, and analysis. The financial

reporting objectives of GASBS 34 only pertain to general purpose external financial reporting.

The biggest change in the financial statements required by Statement 34 is for governments to

issue government-wide financial statements in addition to the traditional funds based statements.

Prior to GASBS 34 governments only issued fund based statements.

Question 5

Distinguish between combining financial statements of a governmental entity and basic

financial statements of for-profit organizations.

Answer:

Combining financial statements are used in a comprehensive annual financial report to aggregate

the financial data of all non-major funds of a category (governmental or proprietary).

Combining financial statements are not part of the basic financial statements but are considered

useful for users who have need for information about particular funds.

Basic financial statements represent a higher level of aggregation in which the financial data for

each fund type (governmental, proprietary, and fiduciary; major and non-major) are reported in
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separate columns. Effects of inter-fund transactions are not eliminated; therefore, the statements

are not "consolidated" in the manner of corporate financial statements.

Question 6

Differences between the economic resources measurement focus and the current financial

resources measurement focus, as well as the difference between measurement focus and the

basis of accounting. Indicate which funds use each focus and each basis.

Answer:

Measurement focus measures an entity's financial performance and position. A particular

measurement focus is accomplished by considering which resources are measured and when the

effects of transactions and events involving those resources are recognized. When effects are

recognized is referred to as the basis of accounting.

The new government wide financial statements consist of a Statement of Net Assets and a

Statement of Activities. These statements are prepared using the economic resources

measurement focus and the accrual basis of accounting. Thus, revenues are recognized in the

accounting period in which they are earned and become measurable without regard to

availability, and expenses are recognized in the period incurred, if measurable.

Governmental fund financial statements continue to be prepared using the current financial

resources measurement focus and the modified accrual basis of accounting. Revenues are

recognized in the accounting period in which they become available and measurable, and

expenditures are recognized in the period in which the fund liability is incurred, if measurable,

There are a number of measurement focuses, the following two are fundamental to current

governmental accounting principles:

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Flow of economic resources focus considers all of the assets available to the governmental unit

for the purpose of providing goods and services. Under this focus, all assets and liabilities, both

current and long-term, are recorded within the fund and depreciation is recorded as a charge to

operations.

Flow of current financial resources focus measures the extent to which financial resources

obtained during a period are sufficient to cover claims incurred during that period. The emphasis

of this focus is on cash and assets that will become cash during or shortly after the current

period. Long-term capital assets and long-term obligations are not recorded within a fund under

this measurement focus.

Basis of accounting refers to when transactions and events will be recognized in the accounting

records and presented in the financial statements. Governmental accounting transactions and

events are recognized on either the accrual basis or the modified accrual basis.

Accrual basis of accounting records revenues in the period in which they are earned and become

measurable; expenses are recorded in the period incurred, if measurable.

Modified accrual basis of accounting recognizes revenues in the period in which they become

available and measurable. Revenues are considered available when they will be collected either

during the current period or soon enough after the end of the period to pay current year liabilities.

Revenues are considered measurable when they are reasonably estimable. Expenditures are

generally recognized when the fund liability is incurred, if measurable.

Under GAAP, the measurement focus and basis of accounting applied varies with fund type

category.

Governmental funds focus primarily on the sources, uses and balance of current financial

resources and often have a budgetary orientation. They employ the flow of current financial

resources measurement focus and the modified accrual basis of accounting.

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Revenues are recognized in the accounting period in which they become measurable and

available.

Expenditures are generally recognized when incurred, if measurable. Exceptions include un-

matured interest on general long-term obligations and compensated absences, which are

recognized when due.

Assets and liabilities reported on the financial statements are limited to those representing

current available resources or requiring expenditure of said resources.

Proprietary funds focus on the determination of net income, the changes in net position (or cost

recovery), financial position, and cash flows. They utilize the flow of economic resources

measurement focus and the accrual basis of accounting.

Revenues are recognized in the period in which they are earned and become measurable.

Expenses are recognized in the period incurred.

Assets and liabilities reported represent all of the assets available and all of the liabilities

outstanding.

Fiduciary funds focus on net position and changes in net position. Trust funds use the flow of

economic resources measurement focus and the accrual basis of accounting, except for the

recognition of certain liabilities of defined benefit pension plans. Agency funds also use the

accrual basis of accounting, but, since they are custodial in nature and do not involve the

measurement of results of operations, they do not use a measurement focus.

Summary of the differences is explaining in the table below:

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FUND ACCOUNTING SUMMARY AT THE FUND REPORTING LEVEL

Fund Basis of
Fund Type Category Measurement Focus Accounting
General Governmental Flow of current financial Modified accrual
Special Revenue Governmental resources Modified accrual
Debt Service Governmental Flow of current financial Modified accrual
Capital Projects Governmental resources Modified accrual
Permanent Governmental Flow of current financial Modified accrual
Enterprise Proprietary resources Accrual
Internal Service Proprietary Flow of current financial Accrual
Trust and Agency: resources
Pension Trust Fiduciary Flow of current financial Accrual
Private Purpose Trust Fiduciary resources Accrual
Agency Fiduciary Flow of economic resources Accrual
Flow of economic resources

FUND ACCOUNTING SUMMARY AT THE GOVERNMENT-WIDE

REPORTING LEVEL
Fund Basis of
Fund Type Category Measurement Focus Accounting
General Governmental Flow of economic resources Accrual
Special Revenue Governmental Flow of economic resources Accrual
Debt Service Governmental Flow of economic resources Accrual
Capital Projects Governmental Flow of economic resources Accrual
Permanent Governmental Flow of economic resources Accrual
Enterprise Proprietary Flow of economic resources Accrual
Internal Service Proprietary Flow of economic resources Accrual
Trust and Agency:
Pension Trust Fiduciary Not applicable Not applicable
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Private Purpose Trust Fiduciary Not applicable Not applicable
Agency Fiduciary Not applicable Not applicable

References

Epstein, M. J., & McFarlan, F. W. (2011, October). Measuring the efficiency and effectiveness of a

nonprofit's performance. Strategic Finance, 93(4), 27-34.

Fischer, M., & Marsh, T. (2012, Fall). Two accounting standard setters: Divergence continues for

nonprofit organizations. Journal of Public Budgeting, Accounting & Financial Management, 24(3), 429-465.

Jacobs, F. A., & Marudas, N. P. (2012, March). Quality of financial disclosures of nonprofit organizations that

report zero fundraising expense. Journal of Finance & Accountancy, 9, 1-12.

Marudas, N., & Jacobs, F. (2011, September). The effects of nonprofit organization-specific factors on

governmental support to nonprofit organizations. Journal of Management & Marketing Research, 8, 1-10

Wilson, E. R., Reck, J. L., & Kattelus, S. C. (2013). Accounting for governmental and nonprofit entities.

16th ed. Boston, MA McGraw-Hill.

Yetman, M. H., & Yetman, R. J. (2012, Fall). The effects of governance on the accuracy of charitable

expenses reported by nonprofit organizations. Contemporary Accounting Research, 29(3), 738-767.