Chapter 12

Nonprofit Organizations
A nonprofit (not-for-profit) organization is a legal accounting entity that is operated for the
benefit of the public as a whole, rather than for the benefit of its owners. Nonprofit
organizations include civic organizations, colleges and universities, hospitals, private
foundations, religious organizations, and social and country clubs.

To be familiar and proficient with the problems involving nonprofit organizations, candidates
should have an understanding of the following aspects of accounting for nonprofit
organizations:

1. Fund Accounting by Nonprofit Organizations

2. Financial Statements for Nonprofit Organizations

FUND ACCOUNTING BY NONPROFIT ORGANIZATIONS

The accounting unit for nonprofit organizations just like in the national government is the fund,
with self-balancing set of accounts, recording cash and other financial resources, together with
related liabilities and residual equity balances, and changes therein, which are accounted for
separately in order to carry on specific activities or to attain certain objectives in accordance
with special regulations, restrictions, or limitations.

Funds of nonprofit organizations usually consist of contributions from donors, investment

income, and government grants. Funds are accounted for separately to distinguish between
assets that may be used as authorized by the board of directors and assets whose use is
restricted by donors. Funds commonly used by nonprofit organizations include the following:

Unrestricted Fund
Restricted Fund

UNRESTRICTED FUND

In many aspects, unrestricted fund is similar to the general fund of a government entity, which
is discussed in Chapter 8. The unrestricted fund includes all the assets of a nonprofit
organization that are available for use as authorized by the board of directors and are not
restricted for specific purposes.

Revenues and Gains of Unrestricted Fund

The revenues and gains of an unrestricted fund are derived from different sources. For
example, a hospital derives unrestricted fund revenues from patient services. A universitys
sources of unrestricted fund revenues include student tuition and fees. Revenues of
unrestricted fund may also include contributed materials and services, unrestricted gifts, and
governmental grants.

Expenses and Losses of Unrestricted Funds

Expenses of nonprofit organizations are usually classified in two groups program services and
supporting services. Program services are the activities of the organization that result in the
distribution of goods and services to customers, beneficiaries, or members that serve the
purposes of the organization. Supporting services are all activities of the organization other
than programs services, such as management and general, fund-raising, and membership
development activities.

Assets and Liabilities if Unrestricted Fund

Most assets and liabilities of a nonprofit organizations unrestricted fund are similar to the
current assets and liabilities of a business enterprise. Cash, investments, accounts receivable,
inventories and prepayments are the usual assets of an unrestricted fund.

RESTRICTED FUND

The assets of restricted funds are not derived from the operations of the nonprofit
organization. These are obtained from restricted gifts or grants from individuals or government
entities, and income from restricted fund investments.

Restricted funds of nonprofit organizations are classified into temporarily restricted and
permanently restricted.

TEMPORARILY RESTRICTED FUND

This consists of assets available for current use but expendable only as authorized by the donor
of the assets. These assets are transferred to the unrestricted fund at the time the designated
expenditure is made.

PERMANENTLY RESTRICTED FUND (ENDOWMENT FUND)

This consists of assets maintained indefinitely in revenue-producing investments. Only the

revenues from the investments may be expended by the nonprofit organization as instructed
by the donor or the board of directors. If there are no restrictions on the use of the income
from the fund, it is transferred to the nonprofit organizations unrestricted fund. Otherwise, the
revenues are transferred to an appropriate restricted fund.
FINANCIAL STATEMENTS OF NONPROFIT ORGANIZATIONS

The financial statements of nonprofit organizations are the statement of financial positions,
statement of activities, and the statement of cash flows.

Statement of Financial Position

This statement shall report (1) the amount of the organizations total assets, total liabilities, and
total net assets, and (2) the amount for each of the three classes of the organizations net
assets: permanently restricted, temporarily restricted, and unrestricted.

Statement of Activities

This statement shall report (1) the amount of the change in the organizations net assets for the
period with a caption such as changes in net assets or changes in equity, (2) the amount of the
changes in each of the three classes of the organizations net assets; permanently restricted,
temporarily restricted, and unrestricted, (3) gross amounts of revenues and expenses of the
organization, except that investment revenues may be reported net of expenses and gains or
losses on disposal of plant assets may be reported net, and (4) expenses by functional
classifications such as program activities and supporting services.

Statement of Cash Flows

The statement of cash flows shall be similar to one that is issued by a business enterprise. This
statement shall report (1) cash provided by operating activities, (2) cash flows from investing
activities, and (3) cash flows from financing activities.
Illustrative Financial Statements

The following financial statements illustrate a format that complies with the current standards:

Nonprofit Organization
Statement of Activities
Year Ended December 31, 2013

Changes in Unrestricted net Assets:

Revenues and Gains:
Contributions P18,000
Fees 12,000
Investment income 14,000
Net gains on investments 16,000
Others 2,000
Total unrestricted revenue and gains P62,000
Net assets released from restrictions 32,000
Total unrestricted revenues, gains, and other support P94,000
Expenses:
Programs 56,000
Management and general 6,000
Fund raising 4,000
Total expenses 66,000
Increase in unrestricted net assets P28,000
Changes in Temporarily Restricted Net Assets:
Contributions P18,000
Investment income 6,000
Net gains on investment 6,000
Net assets released from restrictions (32,000)
Decrease in temporarily restricted net assets P(2,000)
Changes in Permanently Restricted Net Assets:
Contributions P4,000
Investment income 20,000
Net gains on investments 12,000
Increase in permanently restricted net assets P36,000
Increase in net assets P62,000
Net assets, beginning of year 504,400
Net assets, end of year P566,400
Nonprofit Organization
Statement of Financial Position
December 31, 2013

Assets
Cash and cash equivalents P3,400
Receivables (net) 10,600
Inventories 1,400
Investments 440,000
Plant assets (net) 134,600
P589,800

Liabilities and Net Assets

Liabilities:
Accounts payable P11,400
Long-term debt 12,000
23,400

Net assets:
Unrestricted 184,000
Temporarily restricted 100,000
Permanently restricted 282,400
566,400
P589,800
Nonprofit Organization
Statement of Cash Flows
Year Ended December 31, 2013

Cash flow from operating activities:

Increase in net assets P62,000
Items not affecting cash:
Depreciation expense 14,000
Changes in operating assets and liabilities:
Increase in receivables (4,000)
Decrease in inventories 4,000
Decrease in accounts payable (4,000)
Net gains on investments in securities (34,000)
Net cash provided by operating activities P38,000
Cash flows from investing activities:
Acquisition of investments in securities P(58,000)
Acquisition of plant assets (24,000)
Disposal of plant assets 25,200
Net cash used in investing activities P(36,800)
Cash flows from financing activities:
Contributions received P6,000
Interest and dividends received and reinvested 2,000
Payment of long-term debit (10,000)
Net cash used in financing activities P(2,000)
Increase in cash and cash equivalents P(800)
Cash and cash equivalents, beginning of year 4,200
Cash and cash equivalents, end of year P3,400
 PROBLEMS

1. Albert University, a private nonprofit university, had the following cash inflows during
the year ended December 31, 2013:

I. P500,000 from students for tuition.

II. P300,000 from a donor who stipulated that the money be invested indefinitely.
III. P100,000 from a donor who stipulated that the money be spent in accordance to the
wishes of Alberts board of directors.

On Albert Universitys statement of cash flows for the year ended December 31, 2013,
what amount of these cash flows should be reported as operating activities:

a. P900,000
b. P400,000
c. P800,000
d. P600,000

2. Santa Clara Hospital, a private nonprofit hospital, earned P250,000 revenues from its
gift shop located at the lobby and spent P50,000 on research during the year ended
December 31, 2013. The P50,000 spent on research was part of a P75,000 contribution
received during December of 2010 from a donor who stipulated that the donation be
used for medical research. Assume none of the gift shop revenues were spent in 2013.
For the year ended December 31, 2013 what was the increase in unrestricted net assets
from the events that occurred during 2013?

a. P300,000
b. P200,000
c. P250,000
d. P275,000

3. Luneta Park, a nonprofit organization, received contributions restricted for research

totalling P50,000 in 2013. Assume the P50,000 was not expensed in 2013. These
contributions were used to purchase P35,000 of research equipment in 2013. As a result
of these transactions, for the year ended December 31, 2013. Luneta Park will report, on
its statement of activities, a:

a. P15,000 increase in temporarily restricted net assets.

b. P50,000 increase in temporarily restricted net assets.
c. P35,000 increase in unrestricted net assets.
d. P15,000 increase in unrestricted net assets.

4. Santa Fe Hospital, a private nonprofit hospital, had the following cash receipts for the
year ended December 31, 2013:
 Patient service revenue P300,000
Gift shop revenue 25,000
Interest income restricted by donor for the acquisition
of computer equipment 50,000

As a result of these cash receipts, the hospitals statement of cash flows for the year
ended December 31, 2013 would report an increase in operating activities of

a. P325,000
b. P375,000
c. P350,000
d. P350,000

5. San Luis Hospital, nonprofit hospital affiliated with a religious group, reported the
following information for the year ended December 31, 2013:

Gross patient service revenue at the full rates P980,000

Bad debts expense 20,000
Contractual adjustments, value added tax (VAT) 89,090
Allowance for discounts to hospital employees 15,000

On hospitals statement of activities for the year ended December 31, 201, what
amount should be reported as net patient service revenue?

a. P875,910
b. P890,910
c. P855,000
d. P955,000

6. San Jose Hospital, a nonprofit hospital affiliated with San Carlos College, had the
following cash receipts for the year ended December 31, 2013:

Patient service revenue P750,000

Contribution from donor to be invested indefinitely (endowment fund) 250,000
Tuition fees from nursing school 50,000
Dividends received from permanent investments 80,000

The dividends received are restricted by the donor for hospital building improvements.
No improvements were made during 2013. On the hospitals statement of cash flows for the
year ended December 31, 2013, what amount of these cash receipts would be included in the
amount reported for net cash provided (used) by operating activities?

a. P880,000
 b. P800,000
c. P1,050,000
d. P750,000

7. Santa Rosa College, a private nonprofit college, received the following contributions
during 2013:

I. P5,000,000 from alumni for construction of a new wing on the building to be

constructed in 2013.
II. P1,000,000 from a donor who stipulated that the earnings be used for scholarships.
As of December 31, 2013, earnings from investments amounted to P50,000.

For the year ended December 31, 2013, what amount of these contributions should be
reported as temporarily restricted revenues on the statement of activities?

a. P50,000
b. P5,050,000
c. P5,000,000
d. P6,050,000

8. On December 30, 2013, Saint Peter Hospital, a nonprofit organization, received a

P7,000,000 donation of BW Co. shares of stock with a donor stipulated requirements as
follows:

Shares valued at P5,000,000 are to be sold, with the proceeds used to erect a
building.
Shares valued at P2,000,000 are to be retained, with the dividends used to
support current operations.

As a result of the receipt of the BW shares how much should Saint Peter Hospital report
as temporarily restricted net assets on its 2013 statement of financial position?

a. P -0-
b. P2,000,000
c. P5,000,000
d. P7,000,000

9. San Miguel Hospital, a nonprofit hospital affiliated with a private university, reported
the following data for the year ended December 31, 2013.

Cash contributions received from donors for acquisition of

computer equipment on 2014 P150,000
Proceeds from sales of hospital gift shop and snack bar 75,000
Dividend income not restricted by donor 25,000
 Using the information provided, what amount should be reported as other revenue
and gains on the hospitals statement of activities for the year ended December 31,
2013?

a. P25,000
b. P75,000
c. P100,000
d. P250,000

10. A nonprofit organization had the following cash contributions and expenditures in 2013

Unrestricted cash contributions P500,000

Restricted cash contributions for the acquisition of property 200,000
Cash expenditures to acquire property 200,000

The statement of cash flows should include which of the following amounts?

Operating activities Investing activities Financing activities

a. P700,000 P(200,000) P0
b. 500,000 0 0
c. 500,000 (200,000) 200,000
d. 0 500,000 200,000

11. UST Hospital, an nonprofit hospital affiliated with UST, received the following cash
contributions from donors during the year ended December 31, 2012:

Contributions restricted by donors for research P50,000

Contributions restricted by donors for acquisition of
hospital equipment 250,000

Neither of the contributions was spent during 2012, however, during 2013, the hospital
spent the entire P50,000 contribution on research and the entire P250,000 contribution
on hospital equipment which was used during the year.

On UST Hospitals statement of operations for the year ended December 31, 2013, what
total amount should be reported for net assets released from restrictions.?

a. P300,000
b. P50,000
c. P250,000
d. P0
12. Miriam Hospital, a nonprofit hospital affiliated with Miriam College, had the following
cash receipts for the year ended December 31, 2013:

Collections of Philhealth care receivable P750,000

Contribution from donor to establish a term endowment 250,000
Tuition fee from nursing school 50,000
Dividends received from investments in permanent endowment 80,000

The dividends received are restricted by the donor for hospital building improvements.
No improvements were made during 2013.

On the hospitals statement of cash flows for the year ended December 31, 2013, what
amount of these cash receipts would be included in the amount reported for net cash
provided (used) by operating activities?

a. P880,000
b. P800,000
c. P1,050,000
d. P750,000

13. Christian Hospital, a nonprofit hospital affiliated with a religious group, received the
following cash contributions from donors during the year ended December 31, 2013:

Capital acquisitions of hospital equipment P400,000

For permanent endowment 300,000

The cash received for acquisition of hospital equipment will be spent in 2012, while the
cash received for the permanent endowment was used to acquire investments during
2013.

What effect did these cash contributions have on the amount reported for cash flows
from investing activities and cash flows from financing activities on the statement of
cash flows for the year ended December 31, 2013:

Cash flows from Cash flows from

Investing Activities Financing activities
a. Decrease P300,000 Increase P400,000
b. Decrease P700,000 Increase P700,000
c. Decrease P300,000 Increase P300,000
d. Decrease P300,000 Increase P400,000

14. For the 2013 summer session, San Carlos University, a nonprofit university assessed its
students P300,000 for tuition and miscellaneous fees, net amount realized was only
P290,000 because of the following reductions:
 Tuition remissions granted to faculty member families P3,000
Class cancellation refunds 7,000

How much unrestricted current fund revenues from tuition and miscellaneous fees
should San Carlos University report for the period?

a. P290,000
b. P293,000
c. P297,000
d. P300,000

15. For the summer session for 2013, Mindanao State University assessed its students
P1,700,000 (net of refunds), covering tuition and fees for educational and general
purposes. However, only P1,500,000 was expected to be realized because scholarships
totaling P150,000 were granted to students, and tuition remissions of P50,000 were to
faculty members children attending the university.

What amount should Mindanao State University include in the unrestricted current
funds as revenues from student and fees?

a. P1,500,000
b. P1,550,000
c. P1,650,000
d. P1,700,000

16. The following receipts were among those recorded by Baliwag College, a nonprofit
organization, during 2013:

Unrestricted gifts P500,000

Restricted current funds (extended for current operating purposes) 200,000
Restricted current funds (not yet expended) 100,000

What amount should be included as?

Revenues Current Fund

Revenue
a. P800,000 P700,000
b. 700,000 800,000
c. 600,000 600,000
d. 500,000 500,000

17. Love and Care, a nonprofit organization, received the following contributions in 2013:
 I. P50,000 from a donor who stipulated that the money not be spent until 2012.
II. P100,000 from a donor who stipulated that the contributions be used for the
acquisition of equipment, none of which was acquired in 2011.

What is the increase in temporarily restricted net asset for the year ending December
31, 2013?

a. P50,000
b. 150,000
c. 100,000
d. 0

18. Gentle Care Foundation, a nonprofit organization, received the following pledges:

Unrestricted P200,000
Restricted for acquisition of equipments 150,000

All pledges are legally enforceable, however, the foundations experience indicates that
10% of all pledges prove to be uncollectible.

What amount should the foundation report as pledges receivable, net of any required
allowance account?

a. P135,000
b. 180,000
c. 315,000
d. 350,000

19. Bantay Bata Foundation, a nonprofit organization, receives revenue from various
sources during the year to support its child care center. The following cash contributions
were received during 2013:

a. P40,000 restricted by the donor to be used for meals of children.

b. P15,000 received by subscriptions to a monthly child care magazine with a fair
value to subscribe of P10,000.
c. P10,000 to be used only upon completion of a new playroom that was 75%
complete at December 31, 2013.

What amount should Bantay Bata Foundation record as contribution revenues in its
2013 Statement of Activities?

a. P20,000
b. 25,000
c. 10,000
 d. 11,000

20. During the year ended December 31, 2013, Cultural Center of the Philippines, a
nonprofit organization, received the following donor-restricted contributions and
investment income:

a. Cash contribution of P100,000 to be permanently invested.

b. Cash dividends and interest of P5,000 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, 2013, would report an increase of:

a. P105,000 from operating activities.

b. 105,000 from financing activities.
c. 5,000 form operating activities and an increase of 100,000 from financing
activities.
d. 100,000 from operating activities and an increase of 5,000 from financing
activities.
 ANSWERS

1. D 6. B 11. A 16. A
2. C 7. B 12. B 17. B
3. A 8. C 13. B 18. C
4. A 9. C 14. B 19. B
5. A 10. C 15. D 20. B

SOLUTIONS AND EXPLANATIONS

1. Cash inflows related to revenues and expenses which are unrestricted should be
reported in the operating activities sections of statement of cash flows. The cash inflows
from both tuition (P500,000) and the unrestricted contribution (100,000) are both
unrestricted and should be reported as operating activities. Restricted contributions of
300,000 for long-term purposes are reported as financing activities on the statement of
cash flows.
2. Unrestricted net assets increased 250,000 for the year ended December 31, 2013. The
50,000 spent on research during 2013 would be reclassified (added) to unrestricted
revenues when the money was spent on research. To 50,000 addition to unrestricted
revenues, gains, and other support would be accompanied by a 50,000 reclassification
(deduction) from temporarily restricted revenues. The expenses of 50,000 for research
are deducted from unrestricted revenues, etc., which include the 50,000 reclassification.
The 250,000 of gift shop revenue is unrestricted revenue because the board has control
of this revenue.
3. Donor restricted contributions should be reported as revenue on the date received.
These contributions should be reported as temporarily restricted revenues for the year
ended December 31, 2013. The 35,000 spent in 2013 should be reported as a
reclassification (deduction) from the temporarily restricted revenue to unrestricted
revenues. This reclassification is required because all expenses are shown as deduction
from unrestricted revenues, gains, and other support. For the year ended December 31,
2013, the 35,000 reclassification deducted from the 50,000 results in a 15,000 increase
in the net assets of temporarily restricted assets for the year ended December 31, 2013.
4. Cash flows from operating activities would include both the cash received from patient
service revenue of 300,000 and the cash received from gift shop sales of 25,000. Cash
received from investment income that is restricted by donors for the acquisition of long-
lived fixed assets should be reported as financing activitites.
5. The provision for VAT (contractual adjustment) and discounts is recognized as deduction
from gross patient service revenue to determine net patient revenue. Bad debts
 expense is reported as an operating expense. Therefore, net patient service revenue for
2011 is P875,910. This amount is computed by deducting the VAT of P89,090 and the
discounts of 15,000 from gross patient service revenue of 980,000.
6. The cash flows from revenues, gains, and other support which are reported on the
hospitals statement of activities, would be included in the net cash provided (used) by
operating activities on the statement of cash flows. Both the patient service revenue
(750,000) and tuition fees (50,000) are included in the amount reported for cash flows
from operating activities.
7. Contributions should be reported as revenues in the period received, even though
donors have placed time or used restrictions on the contributions. Therefore, the
5,000,000 contribution from alumni for a wing for the building and the 50,000 of
earnings related to the investments should be reported as temporarily restricted
revenues on the statement of activities for the year ended December 31, 2013. The
1,000,000 contribution from the donor, who stipulated that the contribution be
invested indefinitely, should be reported as a permanently restricted revenue on the
statement of activities for the year ended December 31, 2013.
8. The 5,000,000 contribution of BW Co. shares represents temporarily restricted net
assets until the shares are sold and the proceeds used to erect a building. The 2,000,000
contribution of BW Co. shares represents permanently restricted net assets because the
shares are to be retained permanently. Therefore the answer (d) is correct.
9. Other revenue, gains and losses are derived from services other than patient service
revenue. Other revenue typically includes interest and dividends which are unrestricted
as well as proceeds from sales from gift shops and snack bars. Cash contributions from
donors which are restricted to the acquisition of computer equipment during 2014 are
not reported on the statement of activities for 2013. Therefore, the amount that San
Miguel should report as other revenue and gains on its statement of activities for 2013
is 100,000.
10. The 500,000 cash inflow from unrestricted contributions should be reported as an
increase in the operating activities section. The 200,000 cash inflow restricted for the
acquisition of property should be reported as an increase in the financing activities
section, while the use of 200,000 to acquire property should be shown as a decrease in
the investing activities section. The only answer that agrees with this analysis if the
three cash flows is letter (c).
11. Expirations of donor-imposed restriction on temporarily restricted net assets should be
reported on the statement of operations as net assets released from restrictions. Both
the 50,000 and 250,000 was spent in 2013, therefore, reclassifications should be made.
12. The 750,000 and 50,000 should be classified as part of operating activities since they are
restricted for any purposes.
13. Cash inflows (for financing activities) restricted for the acquisition of property should be
reported as an increase in financing activities. The moment they are used then it will be
shown as decrease in investing activities.
14. The university will recognize as revenue the total amount of tuition and miscellaneous
fees net of cancellations, 293,000 (300,000 7,000). The 3,000 of tuition remissions
granted to faculty members families will be treated as an expense.
15. Revenue should include the tuition assessed less any refunds, 1,700,000. The
scholarships of 150,000 and the tuition remissions 50,000 are treated as expenditures
and classified as student aid.
16. Revenues should include all gifts whether restricted or not (800,000). Current fund
revenue will include all unrestricted contributions, 500,000 and restricted current funds
to the extent that they have been expended for current operating purposes, 200,000.
17. Contributions should be reported as revenue in the year received, whether the donors
place time or use restrictions on the contributions. Net assets reported should disclose
whether they are unrestricted, temporarily restricted, and permanently restricted.
Bothe the contributions received 150,000 would increase temporarily restricted net
assets for the year ending December 31, 2013.
18. Pledges are recognized net of uncollectible amounts. Therefore, the net amount of
315,000 (350,000 35,000) will be reported as pledges receivable.
19. The computation of contribution revenue is:

Contribution restricted to be used for meals of children 20,000

Excess of the amount received over the fair value of subscriptions
(15,000 10,000) 5,000
Total P25,000

The 10,000 contribution to be used upon completion of a new playroom is not part of
2013 revenue since the condition has not been fulfilled.

20. The receipt of cash from a donor to establish a permanent endowment should be
presented as a financing activity in the statement of cash flows. The receipt from
investment income that by donor stipulation are restricted for purposes of acquiring
plant, equipment, and other long-lived assets should also be presented as a financing
activity. Therefore, both items (105,000) are considered as financing activities.