NOT-FOR-PROFIT ORGANIZATIONS d.

Statements of financial position as of the beginning and end of the reporting period,
Objectives of Nonbusiness Organizations comparative statements of cash flows, and comparative statements of activities.
1
. Which one of the following is ordinarily not considered one of the major distinguishing
characteristics of nonbusiness organizations? 6
. SFAS 117, Financial Statements of Not-for-Profit Organizations, focuses on
a. Significant amounts of resources are provided by donors in nonreciprocal transactions. a. Basic information for the organization as a whole.
b. There is an absence of defined, transferable ownership interests. b. Standardization of funds nomenclature.
c. Performance indicators similar to a business enterprise’s profit are readily available. c. Inherent differences of not-for-profit organizations that affect reporting presentations.
d. The primary operating purpose is not to provide goods or services at a profit. Gleim d. Distinctions between current fund and non-current fund presentations. AICPA 1194 TMG-
30
2
. Which of the following is a characteristic of nonbusiness organizations?
7
a. Noneconomic reasons seldom underlie the decision to provide resources to nonbusiness . In a statement of financial position, a not-for-profit organization should report amounts for
enterprises. which of the following classes of net assets?
b. Business and nonbusiness organizations usually obtain resources in the same way. I. Unrestricted.
c. Both nonbusiness and business organizations use scarce recourses in the production and II. Temporarily restricted.
distribution of goods and services. III. Permanently restricted.
d. The operating environment of nonbusiness organizations ordinarily differs from that of a. I, II, and III. c. I and III only.
business organizations. Gleim b. I and II only. d. II and III only. Gleim
3 8
. Financial reporting by nonbusiness organizations should provide information useful in . In its statement of activities, a not-for-profit organization may report expenses as decreases in
a. Making resource allocation decisions. which of the following classes of net assets?
b. Assessing services and the ability to continue to provide services. Gleim a. b. c. d.
c. Assessing management stewardship and performance. Unrestricted Yes Yes Yes Yes
d. All of the answers are correct. Gleim Permanently Restricted Yes No No Yes
Temporarily Restricted No Yes No Yes
4
. Typical users of financial reports of nonbusiness organizations include which of the following?
a. Resource providers. c. Governing and oversight bodies. 9
. For which of the following assets held by a religious organization should depreciation be
b. Constituents. d. All of the answers are correct. Gleim recognized in the organization’s general-purpose external financial statements?
a. The house of worship. c. A nationally recognized historical treasure.
Not-for-Profit Organizations b. A priceless painting. d. Land used for a building site. Gleim
5
. SFAS 117, Financial Statements of Not-for-Profit Organizations, establishes standards for
general-purpose external financial statements issued by not-for-profit organizations. A 10
. The Addams family lost its home in a fire. On December 25, 2001, a philanthropist sent
complete set of financial statements should include money to the Benevolent Society to purchase furniture for the Addams family. The resource
a. Statements of financial position as of the beginning and end of the reporting period, a provider did not explicitly grant the Society the unilateral power to redirect the use of the
statement of cash flows, and a statement of activities. assets. During January 2002, the Society purchased this furniture for the Addams family. The
b. A statement of financial position as of the end of the reporting period, a statement of cash Society, a not-for-profit organization, should report the receipt of the money in its 2001
flows prepared on the direct basis, and a statement of activities. financial statements as a(n)
c. A statement of financial position as of the end of the reporting period, a statement of cash a. Unrestricted contribution. c. Permanently restricted contribution.
flows, and a statement of activities. Gleim b. Temporarily restricted contribution d. Liability. AICPA 0595 TMG-58
11
. The Art Museum, a not-for-profit organization, received a contribution of historical artifacts. It c. Permanently restricted net assets.
need not recognize the contribution if the artifacts are to be sold and the proceeds used to d. Either unrestricted or temporarily restricted net assets.
a. Support general museum activities. c. Repair existing collections.
16
b. Acquire other items for collections. d. Purchase buildings to house collections. . Three presentations in the lecture series were held in 2001. The speaker fees for the three
AICPA 0595 TMG-59 presentations amounted to $90,000. The not-for-profit organization used the $50,000 dividend
income to cover part of the total fees. Because the board of directors did not wish to sell part
12
. According to SFAS 116, Accounting for Contributions Received and Contributions Made , what of the investments, the organization used $40,000 in unrestricted resources to pay the
classification(s), if any, should be used by not-for-profit organizations to report receipts of remainder of the speaker fees. In the 2001 statement of activity, the $50,000 of dividend
contributions? income should be recorded as an increase in
Gleim a. b. c. d. a. Unrestricted net assets.
Unrestricted Support No No Yes Yes b. Temporarily restricted net assets.
Restricted Support No Yes No Yes c. Permanently restricted net assets.
d. Either unrestricted or temporarily restricted net assets.
13
. SFAS 116 requires not-for-profit organizations to recognize a conditional promise to give when 17
a. The promise is received. . The NPO’s accounting policy is to record increases in net assets, for which a donor-imposed
b. The promise is received in writing. restriction is met in the same accounting period as gains and investment income are
c. The conditions are met. recognized, as increases in unrestricted net assets. In the 2001 statement of activity, the
d. It is reasonably possible that the conditions will be met. Gleim $120,000 unrealized gain should be recognized as
a. A $40,000 increase in unrestricted net assets and an $80,000 increase in temporarily
14
. Napro Charities, a not-for-profit agency, receives free electricity on a continuous basis from a restricted net assets.
local utility company. The utility company’s contribution is made subject to cancellation by the b. A $120,000 increase in unrestricted net assets.
donor. Napro Charities should account for this contribution as a(n) c. A $120,000 increase in temporarily restricted net assets.
a. Unrestricted revenue only. d. A $120,000 increase in permanently restricted net assets.
b. Restricted revenue only. 18
c. Unrestricted revenue and an expense. . If the lecture series were not scheduled to begin until 2002, the $50,000 dividend income
d. Restricted revenue and an expense. Gleim would be recorded in the 2001 statement of activity as an increase in
a. Unrestricted net assets.
Questions 22 through 26 are based on the following information. Gleim b. Temporarily restricted net assets.
Early in 2001, a not-for-profit organization (NPO) received a $2,000,000 gift from a wealthy c. Permanently restricted net assets.
benefactor. This benefactor specified that the gift be invested in perpetuity with income restricted d. Either unrestricted or temporarily restricted net assets.
to provide speaker fees for a lecture series named for the benefactor. The NPO is permitted to 19
choose suitable investments and is responsible for all other costs associated with initiating and . If the lecture series were not scheduled to begin until 2002, the $120,000 unrealized gain
administering this series. Netierh the donor’s stipulation nor the law addresses gains and losses should be recorded in the 2002 statement of activity as an increase in
on this permanent endowment. In 2001, the investments purchased with the gift earned $50,000 in a. Unrestricted net assets.
dividend income. The fair value of the investments increased by $120,000. b. Temporarily restricted net assets.
c. Permanently restricted net assets.
15
. The $2,000,000 gift should be recorded in the 2001 statement of activity as an increase in d. Either unrestricted or temporarily restricted net assets.
a. Unrestricted net assets.
b. Temporarily restricted net assets.
20
. Following the destruction of its house of worship by fire, a religious organization held a b. $184,000 should be reported as revenue.
rebuilding party. Part of the labor was donated by professional carpenters. The remainder c. $16,000 should be reported as revenue. AICPA 0590 II-11
was donated by members of the organization. Capitalization is required for the value of the d. The gift and its terms should be disclosed only in notes to the financial statements.
services provided by
25
a. The professional carpenters only. . Maple Church has cash available for investments from contributions with different restrictions.
b. The members only. Maple’s policy is to maximize its financial resources. How may Maple pool its investments?
c. The professional carpenters and the members. a. Maple may not pool its investments.
d. Neither the professional carpenters nor the members. Gleim b. Maple may pool all investments but must equitably allocate realized and unrealized gains
and loses among participants.
21
. When a nonprofit organization combines fund-raising efforts with educational materials or c. Maple may pool only unrestricted investments but must equitably allocate realized and
program services, the total combined costs incurred are unrealized gains and losses among participating funds.
a. Reported as program services expenses. d. Maple may pool only restricted investments but must equitably allocate realized and
b. Allocated between fund-raising and program services expenses using an appropriate unrealized gains and losses among participating funds. AICPA 0593 II-40
allocation basis.
c. Reported as fund-raising costs. Health Care Organizations
26
d. Reported as management and general expenses. AICPA 0593 T-60 . Monies from educational programs of a hospital normally are included in
a. Ancillary service revenue. c. Nonoperating gains.
22
. Eleemosynary Institution (EI) received a donation of equity securities with readily determinable b. Patient service revenue. d. Other revenue. AICPA 1189 T-59
fair values. The securities had appreciated in value after they were purchase by the donor,
27
and they continued to appreciate through the end of EI’s fiscal year. At what amount should EI . Which of the following should normally be considered ongoing or central transactions for a not-
report its investment in donated securities in its year-end balance sheet? for-profit hospital?
a. Donor’s cost. I. Room and board fees from patients.
b. Fair value at the date of receipt. II. Recovery room fees.
c. Fair value at the balance sheet date. a. Neither I nor II. c. II only.
d. Fair value at either the date of receipt or the balance sheet date. AICPA 0593 II-38 b. Both I and II. d. I only. AICPA 1195 TMG-75
23 28
. Environs, a community foundation, incurred $10,000 in management and general expenses . Valley’s community hospital normally includes proceeds from the sale of cafeteria meals in
during 2001. In Environs’ statement of activities for the year ended December 31, 2001, the a. Deductions from dietary service expenses.
$10,000 should be reported as AICPA 0592 II-40 b. Ancillary service revenues.
a. A direct reduction of fund balance. c. Part of program services. c. Patient service revenues.
b. Part of supporting services. d. A contra account to offset revenue. d. Other revenues. AICPA 0594 TMG-60
24 29
. In July 2000, Ross irrevocably donated $200,000 cash to be invested and held in trust by a . In health care accounting, restricted net assets are
church. Ross stipulated that the revenue generated from this gift to be paid to Ross during a. Not available unless the directors remove the restrictions.
Ross’s lifetime. After Ross dies, the principal is to be used by the church for any purpose b. Restricted as to use only for board-designated purposes.
chosen by its governing body. The church received interest of $16,000 on the $200,000 for c. Not available for current operating use; however, the income generated is available for
the year ended June 30, 2001, and the interest was remitted to Ross. In the church’s June 30, current operating use. AICPA 0593 II-29
2001 annual financial statements d. Restricted as to use by the donor, grantor, or other source of the resources.
a. $200,000 should be reported as revenue.
30
. In April 2001, Delta Hospital purchased medicines from Field Pharmaceutical Co. at a cost of
$5,000. However, Field notified Delta that the invoice was being canceled and that the
medicines were being donated to Delta. Delta should record this donation of medicines as
a. A memorandum entry only.
b. A $5,000 credit to nonoperating expenses.
c. A $5,000 credit to operating expenses.
d. Other operating revenue of $5,000. AICPA 0595 TMG-60
31
. Which of the following normally would be included in the health care revenues of a hospital?
AICPA 1194 TMG-28 a. b. c. d.
Revenues from Educational Programs No No Yes Yes
Unrestricted Gifts No Yes No Yes

32
. General purpose external financial reporting by a health care organization requires
presentation of
a. Fund group information by a not-for-profit organization.
b. A statement of operations.
c. A separate statement of changes in equity or net assets.
d. A performance indicator only by for-profit entities. Gleim
1
. REQUIRED: The statement not ordinarily considered a major characteristic of nonbusiness organizations.
DISCUSSION: (C) SFAC 4, Objectives of Financial Reporting by Nonbusiness Organizations, states that the objectives
of financial reporting are derived from the common interests of those who provide the resources to nonbusiness
organizations. Such organizations ordinarily have no single indicator of performance comparable to a business
enterprise’s profit. Thus, nonbusiness organization performance is usually evaluated in terms of management
stewardship.
Answers (A), (B), and (D) are incorrect because SFAC 4 specifically gives each as a distinguishing characteristic of
nonbusiness organizations.
2
. REQUIRED: The characteristic of nonbusiness organizations.
DISCUSSION: (C) The operating environments of nonbusiness and business organizations are similar in many ways.
Both produce and distribute goods and services using scarce resources.
Answer (A) is incorrect because many noneconomic factors affect decisions to provide resources to nonbusiness
enterprises. Answer (B) is incorrect because business organizations obtain resources by providing goods and services.
Many nonbusiness organizations obtain resources from contributors and are accountable to the providers of those
resources or to their representatives. Answer (D) is incorrect because the operating environments of nonbusiness and
business organizations are similar.
3
. REQUIRED: The objective(s) of financial reporting by nonbusiness organizations.
DISCUSSION: (D) Answers (A) through (C) are included among the business objectives of financial reporting for
nonbusiness organizations stated in SFAC 4. Additional objectives are to provide information about the liquidity of the
organization, economic resources, obligations, net resources, and changes in them, including managers’ explanations
and interpretations.
Answers (A), (B), and (C) are incorrect because financial reporting by nonbusiness organizations should provide
information useful in making resource allocation decisions, assessing services and the ability to continue to provide
services, and assessing management stewardship and performance.
4
. REQUIRED: The typical users of financial reports prepared by nonbusiness organizations.
DISCUSSION: (D) In addition to those users listed in answers (A) through (C), others potentially interested in the
financial information provided by nonbusiness organizations include managers, organization members, taxpayers,
contributors, grantors, lenders, suppliers, creditors, employees, directors and trustees, service beneficiaries, financial
analysts and advisers, brokers, underwriters, lawyers, economists, taxing authorities, regulatory authorities, legislators,
the financial press, labor unions, trade associations, researchers, teachers, and students.
Answers (A), (B), and (C) are incorrect because resource providers, constituents, and governing and oversight bodies
are typical users.
5
. REQUIRED: The statements included in a complete set of financial statements of not-for-profit organizations.
DISCUSSION: (C) SFAS 117 states that “a complete set of financial statements of a not-for-profit organizations shall
include a statement of financial position as of the end of the reporting period, a statement of activities and a statement of
cash flows for the reporting period, and accompanying notes to financial statements.”
Answer (A) is incorrect because the statement of financial position should be as of the end of the reporting period.
Answer (B) is incorrect because SFAS 117 does not specify how the statement of cash flows is to be prepared. Answer
(D) is incorrect because the statement of financial position should be as of the end of the reporting period, and
comparative statements are not required.
6
. REQUIRED: The focus of SFAS 117.
DISCUSSION: (A) SFAS 117 is intended to promote the relevance, understandability, and comparability of financial
statements issued by not-for-profit organizations by requiring that certain basic information be reported. The focus of
the financial statements required by SFAS 117 is on the not-for-profit organization as a whole.
Answers (B), (C), and (D) are incorrect because, according to SFAS 117, the focus is on the not-for-profit organization
as a whole and on reporting assets, liabilities, and net assets; changes in net assets; flows of economic resources; cash
flows, borrowing and repayment of borrowing, and other factors affecting liquidity; and service efforts.
7
. REQUIRED: The classes of net assets reported in a statement of financial position of a not-for-profit organization.
DISCUSSION: (A) SFAS 117, Financial Statements of Not-for-Profit Organizations, requires a not-for-profit organization
to report amounts for all three classes: permanently restricted net assets, temporarily restricted net assets, and
unrestricted net assets. Information regarding the nature and amounts of permanently or temporarily restricted net
assets should be provided by reporting amounts on the face of the statement or by including details in the notes to
financial statements.
Answers (B), (C), and (D) are incorrect because a not-for-profit organization should report amounts for all three classes.
8
. REQUIRED: The reporting of expenses in a not-for-profit organization’s statement of activities.
DISCUSSION: (C) In a statement of activities, revenues and expenses ordinarily should be reported as gross amounts.
Revenues may be reported as increases in either unrestricted or restricted (temporarily or permanently) net assets.
Expenses ordinarily should be reported as decreases in unrestricted net assets. However, investment revenues,
reported as increases in unrestricted or restricted net assets, may be reported net of related fees such as custodial fees
and investment advisory fees provided that these fees are disclosed either on the face of the statement or in the related
notes.
Answers (A), (B), and (D) are incorrect because not-for-profit organizations should report expenses as decreases in
unrestricted net assets. Expenses do not decrease permanently and temporarily restricted net assets.
9
. REQUIRED: The asset held by a nonprofit organization for which depreciation should be recognized.
DISCUSSION: (A) SFAS 93, Recognition of Depreciation by Not-for-Profit Organizations, requires all nonprofit
organization to recognize the cost of using up long-lived tangible assets (depreciation) in their general purpose external
financial statements. Hence, a building used for religious activity is ordinarily depreciable.
Answers (B) and (C) are incorrect because depreciation does not have to be recognized for certain works of art and
historical treasures whose economic benefit or service potential is used up so slowly that their estimated useful lives are
extraordinarily long. Answer (D) is incorrect because land is normally not depreciated by any organization.
10
. REQUIRED: The reporting of a transfer to an NPO with a direction that the assets be used to aid a specific
beneficiary.
DISCUSSION: (D) SFAS 136, Transfer of Assets to a Not-for-Profit Organization or Charitable Trust that Raises or
Holds Contributions for Others, applies when a donor makes a contribution to a recipient entity that agrees either to user
the assets for the benefit of another entity designated by the donor or to transfer the assets of the beneficiary. The
recipient entity should recognize the receipt of the assets as a contribution if the donor explicitly grants the entity
variance power to redirect the use of the assets or if the recipient and the beneficiary are financially interrelated.
However, if neither of these conditions applies, the recipient entity should recognize the fair value of the assets as a
liability/
Answers (A), (B), and (C) are incorrect because the recipient has not been granted variance power, and the recipient
and beneficiary are not financially interrelated organizations. Thus, the transfer should be accounted for as a liability.
11
. REQUIRED: The circumstances under which a contribution of artifacts to be sold need not be recognized.
DISCUSSION: (B) Contributions of such items as art works and historical treasures need not be capitalized and
recognized as revenues if they are added to collections that are (1) subject to a policy that requires the proceeds of sale
of collection items to be used to acquire another collection items; (2) protected, kept unencumbered, cared for, and
preserved; and (3) held for public exhibition, education, or research for public service purposes rather than financial gain
(SFAS 116).
Answers (A), (C), and (D) are incorrect because, if the proceeds are used to support general museum activities, repair
existing collections, or purchase buildings to house collections, the contribution must be recognized.
12
. REQUIRED: The classification(s), if any, of contributions received by not-for-profit organizations.
DISCUSSION: (D) SFAS 116 requires that contributions received by not-for-profit organizations be reported as restricted
support or unrestricted support. Contributions with donor-imposed restrictions are reported as restricted support.
Restricted support increases permanently restricted net assets or temporarily restricted net assets. Contributions
without donor-imposed restrictions are reported as unrestricted support.
 Answers (A), (B), and (C) are incorrect because not-for-profit organizations must record contributions as unrestricted
support or restricted support.
13
. REQUIRED: The timing of recognition of a conditional promise to give.
DISCUSSION: (C) A conditional promise to give is one that depends on the occurrence of a specified future, uncertain
event to establish the promisor’s obligations. It is recognized when the conditions are substantially met, i.e., when the
conditional promise becomes unconditional. If the possibility is remote that the condition will not be met, the recognition
criterion is satisfied.
Answers (A) and (B) are incorrect because receipt of the promise is not sufficient for recognition of a contribution.
Answer (D) is incorrect because the possibility that the condition will not be met must be remote before a contribution is
recognized.
14
. REQUIRED: The amount at which a contribution of electricity should be recorded by the donee.
DISCUSSION: (C) SFAS 116 defines a contribution of utilities, such as electricity, as a contribution of other assets, not a
contribution of services. A simultaneous receipt and use of utilities should be recognized as both an unrestricted
revenue and an expense in the period of receipt and use. The revenue and expense should be measured at estimated
fair value. This estimate can be obtained from the rate schedule used by the utility company to determine rates charged
to a similar customer.
Answers (A), (B), and (D) are incorrect because the simultaneous receipt and use of electricity should be recorded as an
unrestricted revenue and an expense in the period of receipt and use.
15
. REQUIRED: The classification of a gift to be invested in perpetuity.
DISCUSSION: (C) A donor-imposed restriction limits the use of contributed assets. This gift is unconditional in the
sense that no condition is imposed on the transfer, but it includes a permanent restriction on the use of the assets.
Under SFAS 117, the gift should therefore be classified as an increase in permanently restricted net assets.
Answers (A), (B), and (D) are incorrect because the donor stipulated that the gift invested in perpetuity, a permanent
restriction.
16
. REQUIRED: The classification of expended dividend income generated from investments held in perpetuity.
DISCUSSION: (D) SFAS 117 and 124 require that income from donor-restricted permanent endowments be classified
as an increase in temporarily restricted or permanently restricted net assets if the donor restricts its use. However, if the
donor-imposed restrictions are met in the same reporting period as the gains and investment income are recognized, the
gains and income may be reported as increases in unrestricted net assets, provided that the organization has a similar
policy for reporting contributions received, reports on a consistent basis from period to period, and adequately discloses
its accounting policy. The temporary restriction on the $50,000 of investment income was met by expenditure in 2001,
the year the gain and income were recognized. Thus, the dividend revenue may be classified as an increase in either
unrestricted or temporarily restricted net assets, depending on the NPO’s accounting policy.
Answers (A), (B), and (C) are incorrect because investment income may be reported as an increase in either
unrestricted or temporarily restricted net assets in these circumstances.
17
. REQUIRED: The classification of unrealized gain from investments held in perpetuity.
DISCUSSION: SFAS 117 and 124 permit the recognition of gains and investment income as increases in unrestricted
net assets if the donor-imposed restrictions are met in the same reporting period as the gains and investment income
are recognized, provided that the organization has a similar policy for reporting contributions received, reports on a
consistent basis from period to period, and adequately discloses its accounting policy. The temporary restriction on the
income was met by expenditure in 2001, the year the income and the gain were recognized. Thus, consistent with its
policy, the NPO should treat the gain as an increase in unrestricted net assets. Given that the donor of the endowment
allows the NPO to choose suitable investments and that no permanent restriction is imposed on the gain by the donor or
by the law, the classification of the gain is the same as that of the income.
Answers (A), (C), and (D) are incorrect because NPO’s policy is to report the gain as an increase in unrestricted net
assets if the donor restriction is met in the period the gain and income are recognized.
18
. REQUIRED: The classification of unexpended dividend income generated from investments held in perpetuity.
 DISCUSSION: (B) SFAS 117 requires that gains and investment income from donor-restricted permanent endowments
be classified as increases in temporarily restricted net assets if the donor restricts the use of these resources to a
specific purpose that either expires with the passage of time or can be met by actions of the organization. The
restriction is temporary because it will expire when the income is expended in a future period.
Answers (A), (C), and (D) are incorrect because the donor-imposed restriction is temporary. It will expire when the
income is expended. Moreover, the income cannot be classified as unrestricted because recognition and the expiration
of the restriction do not occur in the same period.
Answers (A), (C), and (D) are incorrect because the donor-imposed restriction is temporary. It will expire when the
income is expended. Moreover, the income cannot be classified as unrestricted because recognition and the expiration
of the restriction do not occur in the same period.
19
. REQUIRED: The classification of an unrealized gain on investments held in perpetuity.
DISCUSSION: (B) given that the NPO has the discretion to choose suitable investments (as opposed to holding specific
securities in perpetuity), the gain is not permanently restricted absent a donor stipulation or a legal requirement. Rather,
the gain has the same classification as the income. The latter is temporarily restricted because it is to be expended in a
future period. Hence, the gain is also temporarily restricted.
Answers (A), (C), and (D) are incorrect because the income and the gain are temporarily restricted.
20
. REQUIRED: The contributed services to be capitalized.
DISCUSSION: (C) Contributions of services by the professional carpenters should be capitalized. Under SFAS 116, the
contributions of services requiring specialized skills, such as those of carpenters, electricians, etc., should be recognized
if they are provided by individuals possessing those skills and would typically need to be purchased if not provided by
donation. SFAS 116 also requires that donated services creating or enhancing nonfinancial assets be recognized even
though specialized skills are not involved. Because the members’ labor helped rebuild the church, their contributions of
services also should be capitalized.
Answers (A), (B), and (D) are incorrect because the church members’ donated labor and the services of the professional
carpenters should be capitalized.
21
. REQUIRED: The correct accounting treatment of combined fund-raising and educational materials or program
services costs.
DISCUSSION: (B) When fund-raising costs are combined with program services costs or educational materials, the
total of these combined services should be systematically and rationally allocated between the programs and fund-
raising.
Answer (A) and (C) are incorrect because costs that do not completely relate to one category should be allocated.
Answer (D) is incorrect because the costs must be allocated to the proper programs to which they relate.
22
. REQUIRED: The valuation of donated equity securities.
DISCUSSION: (C) In its statement of financial position, a not-for-profit organization should measure the following
investments at fair value: (1) equity securities with readily determinable fair values and (2) debt securities. Thus, the
total change in the fair value of the donated securities from the date of receipt to the balance sheet date must be
reported in the statement of activities (SFAS 12ld measure the following investments at fair value: (1) equity securities
with readily determinable fair values and (2) debt securities. Thus, the total change in the fair value of the donated
securities from the date of receipt to the balance sheet date must be reported in the statement of activities (SFAS 124).
Answers (A), (B), and (D) are incorrect because all investments to which SFAS 124 applies are reported at fair value.
23
. REQUIRED: The expense classification for management and general expenses in the statement of activities.
DISCUSSION: (B) Two functional categories of expenses for an NPO are program services and supporting services
expenses. Supporting services expenses, which do not relate to the primary mission of the organization, may be further
subdivided into (1) management and general expenses, (2) fund-raising expenses, and (3) membership development
costs.
Answer (A) is incorrect because a direct reduction of fund balance would be the result of a transfer or a refund to a
donor. Moreover, fund accounting information is not required to be externally reported. Answer (C) is incorrect because
program services expenses related directly to the primary mission of the NPO. Answer (D) is incorrect because only
 costs directly related to a certain source of support, such as a special event or estimated uncollectible pledges, may be
offset against revenue.
24
. REQUIRED: The proper accounting for a split-interest agreement.
DISCUSSION: (A) An NPO should report an irrevocable split-interest agreement. Assets under the control of the NPO
are recorded at fair value at the time of initial recognition, and the contribution is recognized as revenue. Because the
NPO has a remainder interest, it should not recognize revenue from receipt of the income of the trust. Thus, the NPO
should recognize revenue of $200,000 (the presumed fair value of the contributed cash).
Answer (B) is incorrect because the contribution is not reduced by the income paid to the donor. Answer (C) is incorrect
because the income paid to the donor is not revenue of the NPO. Answer (D) is incorrect because the contribution
should be recognized at fair value.
25
. REQUIRED: The true statement about pooling of investments by an NPO.
DISCUSSION: (B) Investment pools, including investments from contributions with different restrictions, are created for
portfolio management. Ownership interests are assigned (ordinarily in terms of units) to the pool categories
(participants) based on the market value of the cash and securities obtained from each participant. Current market
value also determines the units allocated to additional assets placed in the pool and to value withdrawals. Investment
income, realized gains and losses, and recognized unrealized gains and losses are allocated based on the units
assigned.
Answer (A) is incorrect because pooling of investments is allowed to obtain investment flexibility and reduce risk.
Answers (C) and (D) are incorrect because no prohibition exists as to the types of investments that may be pooled.
26
. REQUIRED: The classification of monies derived from educational programs of a hospital.
DISCUSSION: (D) Revenues of a hospital are classified as patient service revenue and other revenue. Other revenue
includes the usual ongoing operating revenues derived by hospitals from sources other than patient care and services.
Major sources of other revenue are student tuition and fees and revenue recognized upon expenditure of donor
restricted gifts, grants, or subsidies for specific purposes such as research and education. Thus, the monies received
from an educational program conducted by a hospital should be classified as other revenue.
Answer (A) is incorrect because ancillary service revenue is included under patient service revenues. Answer (B) is
incorrect because educational program revenue is not directly related to patient care and is, therefore, not includible in
patient service revenues. Answer (C) is incorrect because nonoperating gains typically arise from activities such as
sales of investments or fixed assets, or investment income.
27
. REQUIRED: The item(s), if any, that are ongoing or central transactions for a not-for-profit hospital.
DISCUSSION: Revenue from health care services include inpatient and outpatient services provided directly to patients
for their medical care. The resulting revenues derive from furnishing room and board and nursing services. Health care
service revenues are also earned by the operating room, recovery room, labor and delivery room, and other ancillary
departments that give patient care.
Answers (A), (C), and (D) are incorrect because room and board fees from patients and recovery room fees are ongoing
or central transactions.
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. REQUIRED: The classification of revenue from cafeteria meals.
DISCUSSION: (D) Other revenues are derived from services other than providing health care services or coverage to
patients, residents, or enrollees. This category includes proceeds from sale of cafeteria meals and guest trays to
employees, medical staff, and visitors.
Answer (A) is incorrect because revenues from cafeteria sales are accounted for separately and not as a component of
any related expenses. Answer (B) is incorrect because “ancillary service revenues” is not a proper classification for
hospital revenues. Answer (C) is incorrect because patient service revenues are health care service revenues.
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. REQUIRED: The definition of restricted net assets.
DISCUSSION: (D) In health care organization accounting, the term “restricted” is used to describe resources that have
been restricted as to their use by the donors or grantors of those resources. Temporarily restricted net assets are those
donor-restricted net assets that can be used by the not-for-profit organization for their specified purpose once the
 donor’s restriction is met. Permanently restricted net assets (for example, endowment funds) are those with donor
restrictions that do not expire with the passage of time and cannot be removed by any actions taken by the entity.
Answer (A) is incorrect because donor restrictions are not removable by the board. Temporary restrictions expire by
passage of time or by actions by the entity consistent with the donor’s restrictions. Answer (B) is incorrect because
board-designated restrictions are board-removable. Answer (C) is incorrect because income generated by restricted net
assets can be restricted for specific purposes.
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. REQUIRED: The accounting for a donation of medicine.
DISCUSSION: (D) Contributions of noncash assets that are not long-lived are reported at fair value in the statement of
operations. Donated medicines, office supplies, and other materials that normally would be purchased by a hospital
should be credited at fair value as other revenue because they directly relate to ongoing major operation but are not
derived from services directly provided to patients.
Answer (A) is incorrect because donated assets should be recorded at their fair value when received. Answers (B) and
(C) are incorrect because this donation should be credited to another revenue account or a gain account.
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. REQUIRED: The health care revenues of a hospital.
DISCUSSION: (C) Health care services revenues are derived from services other than health care provided to patients
and residents. Other revenues may include cafeteria sales, tuition from educational programs, donated medicine, and
office space rentals. However, contributions, either unrestricted or for a specific purpose, are treated as gains unless
fund-raising is an ongoing major activity of the hospital. They are recognized at fair value.
Answers (A), (B), and (D) are incorrect because revenues from educational programs are other revenues, but
unrestricted gifts are usually gains.
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. REQUIRED: The true statement about external reporting by a health care organization.
DISCUSSION: (B) The basic financial statements of a health are organization include a balance sheet, a statement of
operations, a statement of changes in equity or net assets, and a statement of cash flows.
Answer (A) is incorrect because fund accounting may be used for internal purposes but is not required or encouraged
for external reporting. Answer (C) is incorrect because the statement of changes in equity or net assts may be
combined with the statement of operations. Answer (D) is incorrect because the statement of operations all HCOs,
including NPOs, should report a performance indicator and other changes in net assets.